a lack of insight do venture capitalists really understand their own decision process abstract what decision criteria do venture capitalists vcs use to make their investment decisions this question has received much attention within entrepreneurship literature i e wells 1974 poindexter 1976 tyebjee and bruno 1984 macmillan seigel and subba narasimha 1985 macmillan zeman and subba narasimha 1987 robinson 1987 timmons et al 1987 sandberg schweiger and hofer 1988 hall and hofer 1993 zacharakis and meyer 1995 for a number of reasons first vc backed ventures achieve a higher survival rate than non vc backed businesses kunkel and hofer 1990 sandberg 1986 timmons 1994 second a better understanding of the decision process may lead to even better survival rates finally entrepreneurs seeking venture funding benefit if they understand what factors are most important to the vc although past research has greatly contributed to our understanding of the decision it may be biased and somewhat misleading the majority of past studies rely on post hoc methodologies e g interviews and surveys to capture the decision process post hoc methods assume that vcs can accurately relate their own decision processes but studies from cognitive psychology suggest that people in particular experts are poor at introspecting introspection is subject to rationalization and post hoc recall biases using social judgment theory and the associated lens model as a framework the current study investigates how well vcs introspect about their own decision process and by extension whether the past research efforts are biased the current research uses policy capturing a real time method common in cognitive psychology to capture the vc s actual theories in use versus their espoused theories hitt and tyler 1991 policy capturing requires that vcs make a series of real time decisions based on various information factors regression analysis of each vcs decision captures how important each of the information factors is to her his actual decision process after the vcs make their decisions they provided a weighting of how they believe they used the information factors comparing the captured decision policies to stated decision policies provides a measure of vc insight the findings suggest that vcs are not good at introspecting about their own decision process even within the confines of a controlled experiment which greatly reduces the amount of information considered vcs lacked strong understanding of how they made decisions most decision makers would like to have all relevant information available for their decision however as more information becomes available insight diminishes finally this study finds that vcs are very consistent in their decision process even though they do not necessarily understand how they make their decisions vcs face a plethora of information when making an investment decision i e business plan outside consultants due diligence etc it may be difficult for vcs to truly understand their intuitive decision process because of all the noise caused by this information overload this lack of systematic understanding impedes learning vcs cannot make accurate adjustments to their evaluation process if they do not truly understand it therefore vcs may suffer from a systematic bias that impedes the performance of their investment portfolio the methodology used in this experiment can be modified and used as a training tool for active vcs in addition the consistent nature of vc decision making even if they do not have a strong understanding of that process is favorable to the development of decision aides decision aides can minimize the danger of salient information e g the lead entrepreneur is a winner clouding the vc s judgment past research also needs to be interpreted in a new light although vcs undoubtedly use some of the information cited in past studies the relative importance of that information needs to be reevaluated vcs may not for instance rely most on the background of the entrepreneurial team in addition it is likely that the past studies provide more information factors than vcs actually use people have a tendency to overstate the information they believe they relied upon and to use far less information typically three to seven factors to make a decision than they actually think they use the methodology used in this experiment has the potential to identify the more relevant information factors cited in previous work even though vcs are experts in the new venture funding realm their decision process has room for improvement almost 40 of all backed ventures fail to provide a return to the vc considering the billions invested each year a modest improvement in the failure rate can have a substantial impact on venture portfolio returns that improvement starts by better understanding the decision process this study is a step in that direction

multistage financing of technical start up companies in silicon valley abstract financing remains an issue that entrepreneurs face long after their initial financing has been obtained in technical companies that face changing customers competitors and technology the need to finance new products to replace earlier products can be of vital importance to growth and survival venture capital firms that invest in technical companies also recognize the need for subsequent financing to maintain growth and thus protect the initial investment this research explored both the venture capitalist s and the entrepreneur s viewpoints the principal questions asked in the research were 1 how are subsequent rounds of investment considered and made by venture capitalists and 2 what problems occur in the entrepreneur s search for subsequent funding a combination of in depth interviews and mailed questionnaires was used in the research to obtain responses from a sample of venture capitalists and entrepreneurs in silicon valley this approach produced observations on the venture capitalists methods of making risk return trade offs and on the reasons why entrepreneurs face problems in obtaining funding for second new products specifically it was found that venture capital firms reduce the risk associated with funding young companies by showing preferences for certain stages of financing or for funding single versus multiple round investments these preferences appear to be idiosyncratic and entrepreneurs must be careful to deal with venture capitalists whose tendencies are consistent with the entrepreneurs goals it was also found that a major problem faced by entrepreneurs seeking funding for second products is the effort required for the search this effort takes away from their ability to perform day to day management activities at a crucial time in the growth of the firm implications are drawn for improving the effectiveness of entrepreneurs and venture capitalists efforts as well as for future research

variants of agency contracts in family financed ventures as a continuum of familial altruistic and market rationalities abstract funding is a critical dimension of new creation although instances of family involvement in new venture financing are common ironically their role has been largely ignored in much of the mainstream business and economics literature when family members invest in the ventures of other family members they must make many choices either explicitly or implicitly about organizational form and governance consequently the governance of these exchange relationships tends to be highly variable this paper explores the primary rationalities governing the exchange relationships in family investment decisions during the early stages of new venture creation it presents activities as variants of agency contracts occurring within a continuum of familial altruistic and business market rationalities existing venture capital theory is extended through the introduction of rationalities and more comprehensive models of decision making

on growth drivers of high tech start ups exploring the role of founders human capital and venture capital abstract in this paper we jointly analyze the effects of the human capital of founders and access to venture capital vc financing on the growth of 439 italian new technology based firms ntbfs we rely on econometric models that control for survivorship bias and the endogeneity of vc financing as to non vc backed firms the competence based argument that the capabilities of ntbfs coincide with founders skills is confirmed nonetheless once a ntbf obtains vc this coincidence vanishes pointing to the coach function performed by vc investors conversely the view that sees the scout function as the main task performed by vc investors is not supported

no news is bad news sensegiving activities media attention and venture capital funding of new technology organizations a significant body of research has examined how new organizations gain legitimacy and how gaining it affects their subsequent access to resources less attention has been given to the problem of how new organizations attract collective attention although related to legitimation the problem of attracting attention is distinct as attention and evaluation are distinct cognitive processes in this study we examine the allocation of collective attention to new organizations in a system of relationships within which new organizations seek to attract attention through their sensegiving activities the information properties of their sensegiving activities affect the level of attention they receive from different types of media and media attention in turn increases their perceived value potential in the eyes of venture capital investors vcs we examine these relationships in a sample of 398 information technology start ups that have obtained different levels of venture capital funding our results show that new organizations that engage in more intense and diverse sensegiving activities attract higher levels of industry media attention and that these effects are enhanced by the human capital of their founders and leaders diverse sensegiving activities are also associated with higher levels of attention from the general media but only the attention of specialized industry media is positively associated with the level of vc funding obtained these findings extend current research on information intermediation and institutional legitimation by demonstrating that media attention early in the life of new organizations affects how they are valued by a well informed expert audience such as vcs they also contribute to entrepreneurship research on the effects of new organizations strategies on their ability to secure resources and to research on vc funding decisions

assessing venture capital investments with noncompensatory behavioral decision models abstract this article examines the prospect of a decision support system for the assessment of venture capital investments it approaches the task of developing decision models from the perspective of the venture capitalist thus venture capitalists have played an active role in defining the predictor variables and in providing data on their own investments venture capitalists and recent research underscore the importance of the entrepreneur in new ventures and the predictor variables selected reflect this bias the literature is now replete with studies demonstrating the superiority of multiattribute actuarial models over human judgment for diverse decision environments ranging from medical science to finance this class of behavioral decision models consists of the simultaneous consideration of several attributes relevant to a decision actuarial models of this kind can be applied to attribute and decision data based on the decision maker s judgments i e expected outcomes before the events transpire termed judgment based models they can also be applied to data on past events or actual outcomes where known termed environment based models again it needs to be emphasized that actuarial models whether based on the decision maker s judgments or on the environment usually outperform the decision maker these general principles are applied here among actuarial models a particular subclass of models is called noncompensatory in these models a low value for one attribute cannot be compensated by a high value for another attribute as an example in selecting a place kicker in football athletic skills other than kicking ability are irrelevant in this study two types of noncompensatory actuarial models conjunctive and disjunctive are used to model both venture capitalists judgments and the environment interviews with venture capitalists reveal that some place strong emphasis on one or two attributes in judging a potential investment this type of decision making behavior indicates a disjunctive decision process at the same time there can be a tendency to ensure that a prospective investment is satisfactory at a minimum the entrepreneur s tenacity courage is a redundant variable that is sublimated in desire for success and enthusiasm capacity for work

comparing the information acquisition strategies of venture capital and commercial lenders a computer based experiment abstract owners and financial planners in new ventures prefer using internal sources of capital as much as possible because they are uncertain about how to obtain external financing and how the involvement of others will impact their ventures because undercapitalization and financial problems are at the center of nearly all business failures it would appear useful for owners and financial planners to reduce the uncertainty surrounding external financing obtaining information about one source of this uncertainty a lack of understanding of the decision processes followed by venture capitalists is the focus of research in this paper and a growing body of literature to further this line of study we investigate the differences in decision behavior of venture capitalists using bankers as a benchmark for comparison in cases in which debt and debt related financing are sought to the extent that venture capitalists have unique decision processes owners and financial planners might improve their ability to obtain financing through knowledge of the unique features of venture capitalists decision processes in addition venture capitalists might improve their decision effectiveness if made aware of systemic biases in their decision procedures using a computer software package to trace information acquisition processes we found that venture capitalists acquired less information and followed a pattern of acquisition that was deeper within categories of information than bankers in addition venture capitalists showed a stronger preference for strategic data and less interest in historical financial data both groups minimized the use of financial forecasts and followed decision processes persistently across different types of companies start up and well established the implications of this study for practice are two fold first if the owners or financial planners of a new or relatively new venture are seeking financing from external sources they should package the business plan and request in a manner that is consistent with the source of financing for example requests from venture capitalists should highlight strategic information such as descriptions of the product or process patentability prospects product market and management team less emphasis should be placed on financial information particularly financial projections in contrast requests for financing by banks should highlight historical financial information such differences between venture and bank financing may lead individuals who are seeking financing to conclude that because historical financial information is of primary importance to bankers bank financing should be sought after the business has developed a positive financial history and trend this would confirm intuition and research findings that venture financing is the primary source of external financing in the early stages of a new venture second bankers and venture capitalists like all decision makers who have developed a degree of expertise in a particular specialty should attempt to gain some insight into their decision processes the goal of obtaining this information would be to provide feedback on processes such as information acquisition which tend to become automatic over time with this knowledge bankers and venture capitalists could examine any biases in their behavior with the ultimate goal of improving performance this paper also has important implications for researchers in particular we have demonstrated that computer based approaches for studying decision behavior offer promise for interesting explorations into important issues such as how venture capitalists make decisions the computer minimizes researcher intrusion in the decision task and permits the collection of process data from samples large enough to permit statistical analyses in addition the subjects determine the length of the task and the direction of the search much as they would in practice which increases the external validity of the research method

predictors of success in new technology based ventures abstract several recent studies have examined the causes of success and failure in new ventures from these a three level analysis has evolved which considers the management the venture s strategy and its competitive environment empirical testing is still at an early stage but results have generally supported the three level approach however the findings are not very strong this study considers only high potential technology based new ventures the companies on which venture capitalists concentrate it suggests that such firms face unusual time pressures and uncertainty and that their responses to these forces are major determinants of success or failure we propose 11 easily measured qualities describing management the firm s strategy and its environment which should influence how quickly the venture can act these should predict a new venture s performance the 11 attributes are tested on 36 new ventures representing essentially all of the startup investments of a major venture capital firm between 1974 and 1982 the data are taken from the firms original business plans performance is measured from the subsequent financial history using the compound rate of return to all shareholders founders employees and investors the ventures in this sample are primarily based on electronic or information technologies they are highly successful as a group with an average compound rate of return of 98 per year they are also very risky the standard deviation of returns is 171 per year and in 11 of 36 cases the shareholders lost on their investments results from a single sample must always be treated cautiously however several findings are strong enough to merit further study and to be incorporated as a part of a process for evaluating new ventures 1 1 a set of four measures representing all three areas explains 57 of the variance the four completeness of the founding team technical superiority of the product expected time for product development and buyer concentration all behave as expected the first two have a positive effect the latter two have an inverted u shaped relationship with an optimum development time of 12 months and an optimum number of customers of approximately 60 three other measures prior shared experience of the founders competitive conditions and projected market share show an influence when management strategy and environment are examined one area at a time 2 2 these relatively simple measures predict success well probably at least as well as any other study has done using more subtle measures 3 3 the measures used in this study though they have strong predictive power apparently did not influence the young capitalists otherwise the relationships should have been different when the return to venture capital investors was used in place of the total return in fact they were the same this suggests that the venture capital investors did not give sufficient weight to the qualities that we consider and could make better choices by giving greater attention to those measures 4 4 prospective entrepreneurs and investors should benefit from using our model aspart of their screening processes specifically they might calculate a predicted rate of return if it is low say below 30 per year they should examine the reason for the low score and consider whether circumstances exist which outweigh or invalidate that apparent weakness 5 5 an additive model seems realistic that is one can combine dissimilar qualities with appropriate weighting for relative importance to arrive at an overall figure of merit with strong predictive power the specific parameters imply that a company must have a complete management team and score well on two of the remaining three measures in order to be an attractive opportunity more generally the model allows a practitioner to make a rough assessment of the tradeoffs among management product and industry this is important because few if any new companies have all the qualities an investor may desire 6 6 although individual qualities of the founders are no doubt important this remains a difficult matter to demonstrate statistically 7 7 firms exist in an ever changing competitive environment to the extent that these findings are valid beyond this sample they may have been recognized and incorporated in more recent new ventures if so this may change the nature of competition and alter the key determinants of success or failure

institutional differences and the development of entrepreneurial ventures a comparison of the venture capital industries in latin america and asia this paper examines how differences in distinct institutional clusters of countries impact on the vital entrepreneurial activity of venture capital and how individuals organizations and their collective action in turn shape those institutions the focus on venture capital offers researchers the opportunity to view an industry that comes from a common root with strong and consistent traditions in which to examine how the differing institutional settings impact on behaviors in different markets and how the institutions themselves may change in these settings we also focus on emerging economies since such economies offer a natural laboratory to study the impact of institutional change specifically this paper employs an institutional theory perspective to examine venture capital in two regions of the world that form institutional clusters of countries latin america and asia it is found that the venture capital industry exhibits a strong consistency across many dimensions yet institutions in these two distinct settings result in significant differences in industry practice therefore this research is able to contribute to both empirical and theoretical understanding of emerging economies institutions in those environments and venture capital

understanding the amenity impacts of wind development on an international border abstract wind energy developments are often controversial concerns are often raised about negative impacts on local communities including impacts on property values some of these negative impacts may be offset by compensatory payments made by wind developers community involvement in the planning and development process may also reduce negative perceptions associated with wind facilities however if the development is near a border between municipalities states or even countries it is often the case that one or more jurisdictions will not be involved in the process or receive compensation but will nonetheless face some costs or impacts from the development we explore exactly this situation at the border between canada and the united states in the thousand islands region where a wind farm is currently operating on the canadian border island of wolfe island using a parcel level hedonic analysis of property sales transactions we find that properties in new york with a view of and or in close proximity to the turbines significantly depreciated in value after construction of the turbines while no negative impacts were observed on properties in ontario we highlight a number of factors that could contribute to these differences in impacts on property values which may also explain the variation in results that currently exists in the literature

private equity investment decisions in family firms the role of human resources and agency costs abstract this study examines decision making criteria that are employed by private equity pe investors selecting family firms hypotheses test the likelihood of investment based on family firm characteristics findings show that pe professionals take into account family specific criteria including human resources and opportunities to reduce agency costs furthermore pe professionals prefer family firms that are already professionalized this research contributes to the family firm literature on both a theoretical and a methodological level exploring nonfamily succession routes and employing techniques conjoint analysis for data collection and multilevel models for data analysis that have seldom been used in this context

turning water into wine exploring the role of dynamic capabilities in early stage capitalization processes technology based ventures face considerable challenges when attempting to raise early stage capital during the early stages of development to create an operational business they need access to financial capital but external investors prefer to see an operational business before investing capital this study extends arguments grounded in dynamic managerial capabilities theory to examine the extent to which various trade offs among the quality of a venture s management team radicalness of the firm s technological resources and demand uncertainty in focal markets impact the ability of ventures to resolve these capitalization challenges we find that higher levels of demand uncertainty and more radical innovations do not appear to enhance the impact of strong management teams on the raising of early stage capital however lower levels of uncertainty do appear to strengthen the effects of strong management teams implications of these findings for dynamic capabilities theory and early stage capitalization processes are discussed

emerging strategies in the venture capital industry abstract this article reports a study of the future direction of the venture capital industry by examining the basic strategies and strategic assumptions of a broad sample of venture capital firms there are three main sets of results first the once homogeneous venture capital industry is rapidly dividing into several different strategic groups members of these groups are increasingly distinguishing themselves from other groups on four basic dimensions followed by member firms 1 financial resources equity capital comes from a greater variety of sources five major sources resulting in fundamentally different demands on the mission of the receiving venture capital firm 2 staff resources the way venture capital firms use staff resources particularly regarding investee management assistance is becoming increasingly varied across different groups some firms provide fewer than 2 days per year while others provide up to 450 man days per year per client 3 venture stages while the overall industry retains a primary interest in stage 1 2 and 3 investment specific firms vary considerably in the distribution of investment emphasis across these three stages 4 use of financial resources firms in the industry are becoming increasingly differentiated in the size of minimum investments they make 100 m to 1000 m and in their role as a direct investor versus a broker for institutional funds practicing venture capitalists should make use of this first set of findings in two ways first they may find it useful to compare their firm s orientation along these four strategic dimensions with those of the firm s that comprised this study second they may seek to use these four strategic dimensions as a basis on which they might examine clarify and or redefine the marketing strategy pursued by their firm a second set of results identified three goals and priorities of venture capital firms that have neither changed over time nor across increasingly different strategic groups annualized after tax return on investments of between 25 and 40 remain the most common objective across all firms a 5 to 6 year investment time horizon and a major emphasis on the quality of the management team in evaluating new deals were universal priorities across diverse venture capital firms a third finding in this study was that venture capital firms profess greater certainty about the future direction of the venture capital industry than the direction of their firm the most notable example of this is a strong sense that industry wide rates of return are headed downward yet few senior partners expect their firm to experience this decline practicing venture capitalists may be interested to peruse these results to see what trends are predicted within the venture capital industry by this subsample of that industry second they should consider the finding that industry wide rates of return are headed downward in light of the first two sets of findings to develop their own opinion about the future performance of different strategic groups within the industry it is important to note that the sample of venture capital firms on which this study was based did not include most of the larger older funds some of these funds would be characterized as industry leaders pace setters and innovators the sample provides a solid representation of the broad middle of the venture capital industry and newer entrants into the industry while larger older funds are under represented their impact on future trends and strategies in the industry is captured to some extent in the set of questions about future direction of the venture capital industry finally the emerging strategic groups in the venture capital industry that were identified by this study may be useful information for investors as well as users of venture capital for investors the opportunity to participate in venture capital activity should become more clearly understood and varied basically this study should help investors differentiate the strategic posture of different venture capital firms and funds on four factors rather than simply industry geographic considerations for users of venture capital the results of this study suggest a possibility for multiple options that are both more accessible and more catered to specific needs users of venture capital should find a clearer basis on which to differentiate venture capital firms in terms of venture stage priorities staff utilization orientations sources and uses of financial resources this should make for more informed shopping among different venture capital sources and provide a basis on which to shop for the most compatible firm

hybrid conjoint analysis an estimation probe in new venture decisions abstract how venture capitalists select start ups for financing has been an interesting topic for many researchers and practitioners the underlying assumption is that people who make money investing in new businesses by assessing the proposals should be experienced enough to distinguish losers from winners our research study tested three models self explicated conjoint and a hybrid comprising the two previous ones conjoint in order to find out 1 if these models could be applied to venture capital decision making and if so 2 to demonstrate the potential of conjoint analysis as a practical research method 3 to test whether or not the characteristics of the entrepreneur the product and the market replicate the venture capital decision this research study confirms what normative literature on decision making emphasizes that in the first stage of an evaluation screening venture capitalists focus on a small subset of criteria in a non compensatory process i e an unacceptable value on one criterion cannot be offset by a high value of another one the important criteria in this phase appear to be the entrepreneur s experience and the existence of a prototype for some decision makers or unique features of the product for others the screening step is more judgemental than analytic in a second stage the evaluation phase however venture capitalists end a detailed examination due diligence process by choosing the most preferred ventures through processes approximating compensatory rules that is a low but acceptable value on one criterion can be compensated by a high value on another the most important criteria identified by the research in this second stage are criteria found in the previous stage product gross profit margin and patent our research demonstrates agreement among venture capitalists in terms of one criterion to evaluate research proposals managerial experience as to the rest of the attributes tested there was variation in the weights assigned to them the findings of this pilot study also confirm the applicability of conjoint analysis as a research method in venture capital decision the approach helps shed light on the decision rules applied and permits the testing of previously researched criteria for predictive validity the method has the advantage of retaining individual preferences and clustering them around venture capitalists demographic and psychographic backgrounds i e years of experience type of education life style and the like or other types of information such as venture fund policies size of the investment type of industry etc the major implication of the study for entrepreneurs is the importance of previous experience in the industry where they expect to develop their ventures and a deep knowledge of the product advantages over competition technical production and cost feasibility they are to produce and market these are the factors that have the greatest influence on venture capitalists evaluation of such projects

a model of venture capitalist investment activity the paper describes the activities of venture capitalists as an orderly process involving five sequential steps these are 1 deal origination the processes by which deals enter into consideration as investment prospects 2 deal screening a delineation of key policy variables which delimit investment prospects to a manageable few for in depth evaluation 3 deal evaluation the assessment of perceived risk and expected return on the basis of a weighting of several characteristics of the prospective venture and the decision whether or not to invest as determined by the relative levels of perceived risk and expected return 4 deal structuring the negotiation of the price of the deal namely the equity relinquished to the investor and the covenants which limit the risk of the investor 5 post investment activities the assistance to the venture in the areas of recruiting key executives strategic planning locating expansion financing and orchestrating a merger acquisition or public offering 41 venture capitalists provided data on a total of 90 deals which had received serious consideration in their firms the questionnaire measured the mechanism of initial contact between venture capitalist and entrepreneur the venture s industry the stage of financing and product development ratings of the venture on 23 characteristics an assessment of the potential return and perceived risk and the decision vis i vis whether to invest the modal venture represented in the database was a start up in the electronics industry with a production capability in place and seeking 1 million median in outside financing there is a high degree of cross referrals between venture capitalists particularly for the purposes of locating co investors factor analysis reduced the 23 characteristics of the deal to five underlying dimensions namely 1 market attractiveness size growth and access to customers 2 product differentiation uniqueness patents technical edge profit margin 3 managerial capabilities skills in marketing management finance and the references of the entrepreneur 4 environmental threat resistance technology life cycle barriers to competitive entry insensitivity to business cycles and down side risk protection 5 cash out potential future opportunities to realize capital gains by merger acquisition or public offering the results of regression analyses showed expected return to be determined by market attractiveness and product differentiation r2 0 22 perceived risk is determined by managerial capabilities and environmental threat resistance r2 0 33 finally a discriminant analysis correctly predicted in 89 4 of the cases whether or not a venture capitalist was willing to commit funds to the deal on the basis of the expected return and perceived risk the reactions of seven venture capitalists who reviewed the model s specification were used to test its validity

an institutional view of china s venture capital industry explaining the differences between china and the west abstract institutional theory argues that institutions in general and culture in particular shape the actions of firms and individuals in a number of subtle but substantive ways the theory has been used to explain a number of significant and substantive managerial differences found in different parts of the world to date the examination of venture capital outside the us and europe however has been rather limited institutional theory also suggests that there would be differences in how venture capital may operate in other parts of the world such as asia where the culture is substantially different from the west based on interviews with 36 venture capitalists in 24 venture capital firms investing in china this exploratory research finds that china s institutional environment creates a number of significant differences from the west the article discusses the impact of these findings on future research on asian venture capital theory development and the activities of venture capital professionals in that region

validation of the venture evaluation model in korea abstract this article examines the validity of the venture evaluation model in korea by directly comparing the relative importance of evaluation criteria on the funding decision with the relative importance of factors influencing venture s empirical performance specifically we first identify the relative importance of evaluation criteria based on whether a deal is accepted or rejected current evaluation model next we derive the relative importance of those criteria revealed in the empirical performance based on the success failure of ventures that overlap with the deals originally used as accepted cases performance based model finally to better understand the differences between the two models we measure the general perceptions of venture capitalists on the importance of those criteria without regard to specific deals normative model to identify potentially important criteria we reviewed the existing related studies on evaluation criteria and we interviewed 10 venture capitalists as a result we selected 31 evaluation items the questionnaire consists of two parts and deals with the following four cases in part a 1 1 case 1 general perceptions concerning the 31 criteria in part b 2 2 case 2 one of the most successful ventures 3 3 case 3 one of the least successful ventures 4 4 case 4 one of the rejected ventures using a five point scale we asked the respondents to rate the 31 criteria based on their general perceptions without referring deals case 1 and on the specific deals they had handled cases 2 3 and 4 to prevent any firm or respondent from affecting the results more than it ought to we distributed the questionnaire to each firm in proportion to the investment amounts we also asked the respondents to fill out only one questionnaire including four cases seventy four venture capitalists including 10 interviewed responded to this questionnaire they have worked as investment directors or managers in the top rated 20 venture capital companies selected according to investment amounts on the basis of the ratings of 31 criteria for the previous four cases we developed three investment models first the current evaluation model reveals which criteria are more important in deciding whether or not to fund the model measures the relative importance of evaluation factors in discriminating between the accept case 2 and case 3 and the reject case 4 decision second the performance based model consists of the relative weights of evaluation factors influencing the two performance categories success case 2 and failure case 3 this model shows the relative importance of evaluation criteria that are reflected in the venture s empirical performance finally we identify the normative model revealing the venture capitalists general perceptions concerning the importance of individual criteria in light of their past field experiences case 1 by comparing the three models we find that the importance of these criteria revealed from venture capitalists perceptions and empirical performances is fairly similar but not sufficiently reflected in the actual deal evaluation in particular the entrepreneur related characteristics are not considered the most important in evaluating venture proposals according to the current evaluation model but they do turn out to be the most important factors in evaluating empirical performance this is in strong contrast to the findings of some existing studies which contend that the entrepreneurrelated criteria ultimately determine the funding decision instead the result confirms the previous assertion that the evaluation of managerial capability is the most challenging task in the venture selection process in the current evaluation model financing ability is considered more important than either superiority of product and technology or production capability contrary to venture capitalists perceptions and empirical performance results therefore it seems necessary to raise the level of specialization of venture capital firms through the acquisition of managerial skills from developed countries and by enhancing the technical background of individual venture capitalists

scarcity of safe assets inflation and the policy trap abstract a goal of this paper is to make sense of the seemingly puzzling behavior of interest rates and inflation and the role of central banks in that behavior during and after the great recession particularly in the united states to this end we construct a model in which government debt plays a key role in exchange and can bear a liquidity premium if asset market constraints bind then there need not be deflation under an indefinite zero interest rate policy zirp further zirp may not be optimal under these circumstances a taylor rule central banker could be subject to a zirp trap and persistently undershoot target inflation as well a liquidity premium on government debt creates additional taylor rule perils because of a persistently low real interest rate we make a case that this is the key policy predicament currently faced by many central banks in the world

have uk venture capitalists a bias against investment in new technology based firms abstract this paper addresses the important question for innovation policy of whether or not uk venture capital firms show a bias against investing in technology based new and young enterprises the evidence from uk and us industry statistics indicates that pro rate american venture capital invest nearly three times as much finance into technology based start up and early stage investments as their uk counterparts when later stage mbo lbo investments are removed from the data us venture capital firms are also more likely to invest at the earlier stages of investment while the uk industry has increasingly come to be dominated by management buy outs buy ins and other later stage refinancing activities in 1991 a postal survey was conducted of 40 investing firms from a population of 75 uk venture capitalists which currently invest or are prepared to consider investing in technology based companies the sample was segregated into generalist funds and technology specialists depending on the percentage greater or less than 50 of technology based investee companies within the venture capitalists current portfolios the results confirmed that technology projects had to meet more rigorous selection criteria than non technology projects in undertaking technology based project evaluations investors imposed higher investment return hurdle rates at each stage of investment other than seed capital technology based projects were also more frequently required to address minimum markets greater than the uk alone when compared to other investment categories no material bias was found between the actions of generalist and specialist funds towards technology based projects the ratio of technology based projects offered to technology based projects accepted was similar for both groups

informal risk capital investors investment patterns on the east coast of the u s a abstract in this study we profile a group of informal investors their investment criteria and the nature of their referral network the study supports the findings of several earlier studies it indicates the existence of an extensive informal investment community on the east coast of the u s a which can provide substantial financial resources to startup and young firms a full 58 of the sample investments were in startups a huge proportion compared with formal venture capital sources the study further supports earlier findings that this group is difficult to locate for entrepreneurs and researchers alike this opaque market consists primarily of friends and business colleagues who individually provide modest sums of money 20 000 50 000 but are often able to use their network to assemble a group of investors who will sponsor the entire funding requirement 130 informal investors report that in three years they and their networks raised 38 million dollars to support 286 new venture proposals there are also encouraging indications that these angels are both enthusiastic and persistent many of them claim that they have achieved higher returns via angel activity than any other investment options that they have tried of the angels who did better with alternative investment options more than 80 are still prepared to make further investments even those who reported failed investments in the informal risk capital market remain supportive over 65 indicate a willingness to invest again the criteria by which the angels screen the proposals differ markedly from those of the venture capital community in particular the angels do not appear to be interested in a thorough business plan a sine qua non for venture capitalists unlike the capital firms angels are not interested in competitive insulation they do not limit their investments to industries that are appealing or with which they are familiar nor do they care very much about the degree to which the entrepreneur has identified competition however they are in close agreement with the venture capital community in their concern with the management ability of the venture team and a requirement that there be a clear demonstrated need for the product or service preferably in a market with large potential the study has shed some light on the structure of the referral networks of angels though we do not know from this study how the respondents themselves first heard of the ventures that were described in this survey we do know that their referral network is composed primarily of friends and business colleagues to whom they refer as much as 60 of the proposals that they receive and in which they themselves eventually invest thus they pass on serious opportunities to their network their referees are inclined to be very supportive in our sample almost 75 of them also invested in the venture the current strategy for informal investors is to approach mainly close contacts these are inclined to be supportive 85 also invested in the venture and to follow a trusting investment behavior pattern relying mainly on the recommendation of the angel this strategem ensures that the total capital requirements are met via the network however given the results of this study the angels might be well advised not to stop here they might also approach at least one professional only a small proportion of professionals were approached by our sample of angels less than 30 as the study shows professionals are more effective at selecting successful ventures thus a mixed strategy may be called for use mainly trusting referees to ensure full capitalization and a limited number of professional referees to screen the proposals this will help ensure that those proposals that do get supported by the more trusting members of the network have been competently screened thus increasing to the probability of venture success a discriminant analysis revealed some useful pointers in helping the informal investor select successful ventures first it is critical to select only ventures in which the entrepeneur can be relied on to evaluate the risks of the ventures and manage these risks well angels do not need entrepreneurs that will gamble with their money equally important is to avoid placing too much credence on highly articulate sales pitches by the venture team or too much reliance on ventures in which the main emphasis is on product and proprietary protection rather insist on being shown clear evidence that the product or service has channel and or market acceptance it is also important for angels to stick to investments where they know the industry well and to back venture teams with a solid reputation and a propensity to get involved in the details rather than gloss them over as in the case of studies of venture capital investments competitive insulation in the early stages of the venture is also important

publicly traded venture capital funds implications for institutional fund of funds investors abstract institutional investors supply the bulk of the funds which are used by venture capital investment firms in financing emerging growth companies these investors typically place their funds in a number of venture capital firms thus achieving diversification across a range of investment philosophy geography management industry investment life cycle stage and type of security essentially each institutional investor manages a fund of funds attempting through the principles of portfolio theory to reduce the risk of participating in the venture capital business while retaining the up side potential which was the original source of attraction to the business because most venture capital investment firms are privately held limited partnerships it is very difficult to measure risk adjusted rates of return on these funds on a continuous basis in this paper we use the set of twelve publicly traded venture capital firms as a proxy to develop insight regarding the risk reduction effect of investment in a portfolio of venture capital funds i e a fund of funds measurements of weekly total returns for the shares of these funds are compared with similar returns on a set of comparably sized maximum capital gain mutual funds and the daily return of the s p 500 index a comparison of returns on an individual fund basis as well as a correlation of daily returns of these individual funds were made in order to adjust for any systematic bias resulting from the thin market characteristic of the securities of the firms being observed the scholes williams beta estimation technique was used to reduce the effects of nonsynchronous trading the results indicate that superior returns are realized on such portfolios when compared with portfolios of growth oriented mutual funds and with the s p 500 index this is the case whether the portfolios are equally weighted i e naive or constructed to be mean variant efficient ex ante according to the capital asset pricing model when compared individually more of the venture funds dominated the s p market index than did the mutual funds and by much larger margins when combined in portfolios the venture capital funds demonstrated very low beta coefficients and very low covariance of returns among portfolio components when compared with portfolios of mutual funds to aid in interpreting these results we analyzed the discounts and premia from net asset value on the funds involved and compared them to thompson s findings regarding the contribution of such differences to abnormal returns we found that observed excess returns greatly exceed the level which would be explained by these differences the implications of these results for the practitioner are significant they essentially tell us that while investment in individual venture capital deals is considered to have high risk relative to potential return combinations of deals i e venture capital portfolios were shown to produce superior risk adjusted returns in the market place further these results show that further combining these portfolios into larger portfolios i e funds of funds provides even greater excess returns over the market index thus plausibly explaining the fund of funds approach to venture capital investment taken by many institutional investors while the funds studied are relatively small and are either small business investment companies or business development companies they serve as a useful proxy for the organized venture capital industry despite the fact that the bulk of the funds in the industry are institutionally funded private closely held limited partnerships which do not trade continuously in an open market these results demonstrate to investors the magnitude of the differences in risk adjusted total return between publicly traded venture capital funds and growth oriented mutual funds on an individual fund basis they also demonstrate to investors the power of the fund of funds approach to institutional involvement in the venture capital business because such an approach produces better risk adjusted investment results for the institutional investor it seems to justify a greater flow of capital into the business from more risk averse institutional investment sources this may mean greater access to institutional funds for those seeking to form new venture capital funds for entrepreneurs seeking venture capital funds for their young companies it may also mean a lower potential cost of capital for the financing of business venturing from the viewpoint of public policy makers interested in facilitating the funding of business venturing it may provide insight regarding regulatory issues surrounding taxation and the barriers and incentives which affect venture capital investment

incremental impact of venture capital financing this paper investigates the differences in the return generating process of venture capital vc backed firms and their peers that operate without vc financing using a unique hand picked database of 990 vc backed belgian firms and a complete population of belgian small and medium sized enterprises smes we focus on the extent to which the presence of a vc investor affects the sensitivity of a firm s returns to the changes in the capital structure in the operating cycle and in the industry dynamics the differences may stem from the self selection of better companies into vc portfolios from the venture capitalists vcs value adding activities and or from both we examine these factors in the context of a complex simulation procedure which allows separating selection from value adding when traditional approaches are difficult to implement our results indicate that vc backed firms are able to extract more rent from the changing industry conditions and from the optimizations in their capital structure the presence of vcs in the firm s equity seems to have only a marginal effect on the operating cycle efficiency overall the results are suggestive of the value adding being the main driver of the vc backed firm s performance

venture capitalists decision policies across three countries an institutional theory perspective this paper examines the influence of economic institutions upon venture capitalists vcs decision policies we conducted policy capturing experiments on 119 vcs across three countries representing distinct economic institutions us mature market economy south korea emerging economy and china transitional economy results show that vcs in rules based market economies us rely upon market information to a greater extent than vcs in emerging economies korea and chinese vcs transitional economy weight human capital factors more heavily than either us or korean vcs findings suggest that although professional institutions may dictate which information is included in vc decision policies the extent to which that information is emphasized is determined partly by the economic institution in which the decision maker operates journal of international business studies 2007 38 691 708 doi 10 1057 palgrave jibs 8400291