How to Invest in the Next Unicorn: Venture Capital Investment Selection in Silicon Valley, Japan, and Southeast Asia

This Stanford master’s thesis research examines investment selection decision-making at venture capital (VC) firms. In addition, it compares and contrasts similarities and differences between firms and across geographic regions. As part of this research, I conducted in-depth qualitative interviews with venture capitalists (VCs) at 32 venture capital firms in Silicon Valley, Japan, and Southeast Asia. I asked interviewees a range of questions about the investment selection decision-making practices and methods at their firms. I also asked each of them a series of questions about one initial investment that their firm had made in the past few years in which they were directly involved and which they consider to be representative of their approach. In addition, I asked them each about distinctive aspects of the venture capital industry in their respective country or region. Although the sample size was too small for formal quantitative analysis, this thesis research revealed a number of distinct patterns in the decision-making practices and methods of professional venture capital investors. The patterns confirm some of the findings of Gompers et al. 2020, e.g. regarding investment sourcing, but were notably different regarding the most attractive aspects of investments. This may be because this thesis research – unlike Gompers et al. 2020 – allowed for open-ended responses, rather than pre-set survey questions. Major issues examined in this research include: (a) investment committee voting policies and practices of VC firms; (b) the frequency with which VCs use an investment selection scoring matrix or other formal evaluation system; (c) methods used in sourcing investments; (d) the frequency with which specific portfolio companies had revenue at the time of the series A round; (e) investor perceptions of IPO versus acquisition as the likely path to exit at the time of initial investment; (f) the frequency with which VCs use opinions from outside experts in evaluating potential investments; (g) competition among VCs for deals, as measured by the presence of competing term sheets; (h) factors reported by VCs as the most important attractive aspects of specific investments; (i) factors viewed by VCs as the most important aspects of evaluating the strength of the team for specific investments; (j) issues identified by VCs as the most concerning potential weaknesses of particular investments; (k) the most important factors, as reported by VCs, when considering whether or not to make follow-on investments in specific portfolio companies; (l) and distinctive aspects of the VC industry in Silicon Valley, Japan, and Southeast Asia, as described by VCs in those regions. This thesis research may be useful for academic researchers planning to conduct further research on VC investment selection decision-making, including survey-based research such as that conducted by Gompers et al. (2020). It may also be useful for practicing VCs who are interested in studying the current investment selection practices and methods of other VCs at successful VC firms across multiple regions.

Keywords:  Stanford Global Studies
VC
Venture capital
Capital investments > Decision making
Venture capital > Finance
Venture capital > Decision making
Investments
Capital investments
Capital investments > Evaluation
Entrepreneurship
Southeast Asia
ASEAN
Asia
Entrepreneurship > Finance
New business enterprises
New business enterprises > Finance
New business enterprises > Evaluation
Startup company
Unicorn company
Founders
Japan
Text
Thesis
Advisor: Dasher Richard