venture capital investment criteria proposal

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Venture capital investment criteria proposal

To browse Academia. Skip to main content. Log In Sign Up. Venture Capital Investment Criteria. Izindi Visagie. Free PDF. Download Free PDF. Download with Google Download with Facebook Or create a free account to download. Premium PDF Package. A short summary of this paper. Cleantech, IT, Telecoms and Biotech.

The team picture illustrates the underpinning of Venture Capital by people, the entrepreneurial team and the Venture Capitalists. Research Methodology Ranking of criteria Ranking of elements of criteria Effect of the stage of the investment company on ranking of criteria Effect of phase of fund on ranking of criteria Effect of types of VC investors on ranking of criteria Other factors Suggestions for further research Conclusions and recommendations UK average is an average of 14 responses This paper considers investment criteria used by Venture Capitalists VCs.

It reviews the available literature and, through an entirely new data set collected for the purpose of this paper, sets out and analyses the relative importance VCs attribute to the following criteria: Management Team Market Drivers Product Scalable Business Model Commercial Proof of Concept VC specific factors such as pre-existing portfolio and fund phase Sixteen VCs ranked the above criteria in relative order of importance. Figure 1 below illustrates the findings of this paper that for the sixteen VCs interviewed, Management Team is the most important criterion, shortly followed by Market, then Product, Scalable Business Model, Commercial Proof of Concept, and lastly VC specific factors.

The importance of Product, Commercial Proof of Concept and Scalability of Business should not be underestimated, even though these rank lower relative to Team and Market. Some VCs will not invest unless all of these criteria are met.

This paper breaks down the elements and analyses their relative importance. Within the Team criterion, Personal Motivation and Industry Experience are the most important elements. Field and Level of Education is considered least important of the Team characteristics analysed. Previous studies have found Field and Level of Education to be very important, but this paper suggests that VCs do not consider it as important as any of the other Team characteristics.

The findings that Personal Motivation ranks highest and Field and Level of Education lowest make new contributions to the literature. Data analysed for this paper suggests that, within the Market criterion, VCs generally prefer first movers over second movers when considering a potential investment. In considering new investments, VCs consider the timeframe within which the company will deliver a return on investment to be more important than the phase of their fund or pre-existing portfolio.

The author considers whether the order of importance of the six criteria above changes depending on the: Stage of the company invested in. The two groups consider the remaining criteria similar in order of relative importance.

Experience of the VC. Although the order of criteria is not different for VCs with more or less experience, the more experienced VCs appear to place a higher premium on Team, Market and VC specific factors relative to their less experienced colleagues. More experienced VCs rank the characteristics of a good team i. The majority of VCs say that the order of importance of criteria would change in the later phase of their fund with VC specific factors increasing in relative importance.

Scalable Business Model is considered more important by VCs in smaller firms, taking 3rd place whereas for VCs in larger firms, this criterion falls to 5th place. VCs in larger firms appear to consider VC specific factors almost twice as important as their counterparts in the smaller firms do. The limited sample indicates that there is no marked difference between the relative rankings of VCs in the UK, Canada and Europe.

However, the author considers that the small sample size does not provide sufficient information on criteria employed by VCs in countries outside of the UK and further research is recommended. The paper also reflects on the following: Whether VCs use a different process to assess the business proposals received through referrals from within their existing networks than they do if a proposal is received cold.

Whether UK VCs tend to use anti-dilution measures. It is found that UK VCs tend to use anti-dilution measures more infrequently than their American counterparts are reported to do. Entrepreneurs should be aware that VCs backed by different types of investors may consider criteria in different order of importance. The country within which the VC operates may also have an effect on their investment approach. VCs are of the view that referred business plans are on the whole better than proposals received cold.

In negotiating investment agreements, entrepreneurs should not assume that all VCs used anti-dilution measures. This paper is important for entrepreneurs seeking funding, VCs and the academic investigation of VC decision making because it provides a new data set, a considered refinement of existing criteria used in other studies and an in depth statistical analysis of the importance VCs attach to those criteria. The research undertaken for this paper is important and highly relevant, being the only study the author is aware of that focuses on UK VCs.

Introduction Decision making criteria employed by VCs has been a source of fascination to many; entrepreneurs seeking funding, VCs seeking comparability and academics seeking wisdom. VCs are considered experts in identifying promising companies, as is evidenced by the higher survival rate of VC backed ventures, compared to non-VC backed ventures Kunkel, This paper aims to change that, with a focus largely on UK VCs and their decision making.

Proposals are received by VCs in the origination stage, with numbers thinning out at every subsequent stage. Hudson determined investment ratios to vary between 1. Academic sources suggest that VCs use different criteria in making their decisions at different stages of the decision-making process, i. The author found that the processes for screening and evaluation differ amongst individuals in practice2.

Activities in the VC decision-making process arise simultaneously rather than consecutively Huyghe, and for this reason no distinction is made between decision making in the screening and evaluation phases. Intuition is relied upon heavily by VCs: a non-conscious process created from distilled experience Gilovich et al, Explaining and justifying the considerations that inform such an intuitive decision is difficult to pin-point.

The author will set out in this paper the results from interviews with sixteen VCs and the aggregated ranking of criteria will be calculated and analysed. The author will consider whether and to what extent VC fund phase, fund size, VC investors, their experience, culture within they operate or stage of the company they invest in, may have an effect on the relative importance of 2 Often the more junior VCs would screen business plans, but the threshold would vary across firms, with some firms setting deliberately low thresholds and some setting stricter criteria.

In other firms, the experienced VCs would carry out the screening process themselves. Sometimes the individuals carrying out the screening process would not consciously use different methods for screening as they would in evaluation; screening would just be filtering the sensible plans.

A list of the questions as they arise in the text below, are summarized here for ease of reference: No. Questions Chapter 1 In what order of relative importance do VCs rank investment criteria? Do they place more importance on Team relative to other criteria in making later stage investments?

Characteristics of the target company could also affect the decision making by the VC: novelty of the business plan or its presentation, motion, sounds, size, background, proximity and similarity of the team or the business plan Robbins et al, In asking VCs how much importance they attach to different criteria when assessing new ventures, the retrievability bias may creep in and distort results.

VCs may also post-rationalise previous decisions; their reflections may not be an accurate description of their actions at the time of evaluating the investment. The Research Methodology in section 3 explains why the interview methodology adopted by the author was considered appropriate to elicit the relative importance of criteria despite the above limitations. The author proceeds by providing background to the VC industry, setting out the research methodology, analysing the rankings of criteria and elements and suggesting further research.

Limitations of the research methods and findings are considered. The paper concludes with recommendations. Background 2. In the UK, the VC market began to take off in the s10, but it was not until the late s that it started to take hold in the rest of Europe. Venture capital in Asia is still relatively new, despite the fact that the first Asian VC firm was set up in Japan in However, total UK VC investment only represents 0.

Life science was the most invested sector in Europe in terms of companies financed in , and the second largest market in value terms. Across the world, the time taken to successfully exit a VC investment through flotation now averages almost 7 and a half years, the longest time seen over the past two decades Yannis Pierrakis, NESTA As a result of low returns and problems with exits, raising new funds has become more difficult VCs are also changing in terms of where investments are made and who they invest with.

In what appears to be an effort to diversify their investment portfolio or capitalize on more favourable markets, investors are increasingly more inclined to invest outside of their home countries. Syndication 18 is now commonplace 15 The impact of the financial crisis does not appear to be as severe as that of the dotcom crisis. During the dotcom crisis in , VC firms suffered a significant decrease approximately 1.

Since then, the number has fallen to around National Venture Capital Association, The proliferation of government backed VC funds, particularly in the UK, is further changing the industry. Many CVCs are set up as evergreen funds that aim to operate independently of their parent organizations on a commercial basis.

Research Methodology 3. A wide range of Venture Capital firms were investigated in terms of size, industry specialization, company stage preferences, and limited partners in order to devise an appropriate representative sample to approach. Data on levels of investment by firms per country as reported in Appendix 2 and analysis of VC returns as reported in Appendix 1 was gathered from Thomson One Banker.

UK, Canada and Europe. Care was taken to ensure that the VCs interviewed represented a cross- section of types of limited partners. Due to some overlaps in industries, interview results could not be isolated by industry. Different stage investors from early to late stage were included within the sample, and were isolated into two groups for Question 2 This was problematic as most of the VCs invest across a range of stages from early to late, with the later stage investments tending towards larger amounts and therefore slightly skewing the data.

Some VCs did however tend to make more early stage investments than others. The author was careful to ensure that a cross-section of VCs managing different size funds, were included within the sample. The interviews in person lasted on average 45 minutes up to 2 hours in one case, but no shorter than 30 minutes and telephone interviews on average 35 minutes.

The questions posed to VCs are included in Appendix 4, but scope was allowed for general discussion around the criteria and weightings. Detailed contemporaneous notes were made of the discussions Early studies into venture capital decision making relied primarily on interviews and surveys that are prone to post hoc recall and rationalization biases Zacharakis and Meyer, Findings that VCs actually employ different criteria to what they say they employ, Hall and Hofer, D.

Shepherd, a 24 have further placed in doubt the usefulness of post hoc interview techniques. Subsequently, different methods of analysis such as conjoint analysis D. Although valuable, the limitations of the small sample size in the Mason and Stark study , artificiality and the oversimplication of the context of the cases presented to VCs in some of these studies cannot be ignored.

The author finds the remaining criteria tested by Shepherd useful in the sense that they prove that VCs prefer certainty, long lead times, and low competition. Observation, as a method of determining the importance of criteria used, paints a picture limited by the circumstances of the particular business plan and is therefore also inappropriate as the basis for generalizations.

In addition to all the other limitations, the logistical difficulties of all of these methods were considered to be prohibitive. The author attempted to eliminate post hoc recall and rationalization biases by structuring the questions such to require respondents to both rank and rate separately 25 the given criteria, akin to that of a repertory grid. The interview set-up was also used as a method of discussing the questions and responses rather than leaving it to the VC to respond to a written questionnaire.

Furthermore, the author feels that VCs should be given some credit for self-awareness and ability to recognize biases in their responses. The author experienced that interviewees were not always receptive to highly structured measurement instruments and were not always prepared to rank and rate criteria.

Interviewees generally viewed every deal to be peculiar to itself, and resisted generalizations Tyebjee and Bruno, However, the interview process allowed the interviewees to query the listed criteria, express views on the criteria and the freedom to explain their thought process.

To avoid reticence by the interviewees to speak freely, the author did not record interviews and results of the interviews are anonymised in this paper. A separate document that includes names and fund details of the interviewees has been submitted to Cass Business School on a confidential basis.

Values were then attributed to each rank in accordance with the Borda count method 26 , i. In all other cases, criteria and elements were considered important and were allocated a value according to their ranking in order of importance. The sum of the values attributed to the responses formed the basis for the reported results, in accordance with the Borda count method. It should be noted that, due to the small sample size of sixteen 26 The Borda count is a single-winner election method in which voters rank candidates in order of preference.

The Borda count determines the winner of an election by giving each candidate a certain number of points corresponding to the position in which he or she is ranked by each voter. Once all votes have been counted the candidate with the most points is the winner. Because it sometimes elects broadly acceptable candidates, rather than those preferred by the majority, the Borda count is often described as a consensus-based electoral system, rather than a majoritarian one.

The Borda count was developed independently several times, but is named for the 18th-century French mathematician and political scientist Jean-Charles de Borda, who devised the system in Wikipedia. Ranking of criteria The criteria used within this paper, short explanations of their meanings and literature source of previous use, are indicated below: Criteria Evidence for use Means the entrepreneurial team and their characteristics. Associated with the market, are competition considerations including Market drivers barriers to entry Tyebjee , MacMillan Hutt Hisrich Kahn Muzyka et al Means uniqueness of the product, attributes of the product or profit margins.

Tyebjee , MacMillan Means the development of a product to the point of a functioning prototype that has potential to generate profit. This criterion was included as a stand-alone criterion to ascertain its importance relative to the other criteria, and to ascertain whether early Commercial proof of concept or late stage investors would view the importance of this criterion differently. MacMillan Means the factors specific to the VC such as the fund's portfolio, fund phase or timeframe within which a return is required in order to fit in with the time horizon of VC specific factors the fund Fulghieri and Sevilir Petty Table 2: Investment criteria with brief explanation and evidence for use Investment criteria have been studied extensively over the years using different methods, including interviews, conjoint analysis, verbal protocol analysis, observation, etc.

However, using the conjoint analysis method to show what VCs actually do as opposed to what they say they do , Shepherd showed that the same VCs ranked industry-related competence a Team characteristic far higher than any of the other criteria. In another article Shepherd b explains that while market considerations key success factors, stability and timing and competition considerations lead time and competitive rivalry are important when assessing the survival chances of a new venture, they are difficult to predict at new venture stage due to uncertainties; VCs manage these uncertainties by choosing a management team that will be able to cope with changes.

The relationship between the VC and the entrepreneur is an essential determinant of the success of ventures Shepherd and Zacharakis, and may be more important to the venture than the actual capital provided.

Hall and Hofer, found that most VCs stated that the entrepreneur is the most important factor in making their decisions, but in fact market factors are most important in the screening phase of their decisions. VCs were asked to rank the six criteria in order of importance; the Borda count method was used to allocate values to each ranking. Most VCs felt that all of these criteria were very important, and so although the criteria are ranked in order of importance, it is not correct to assume that the lower ranked criteria are unimportant.

While the ranked criteria give a strong indication of what VCs consider important, in evaluating a proposal with a view to investing positive action , some of the criteria may be more important as reasons for the VC to not invest negative action. The sum of the values in Table 3 shows the highest sum value is attributed to Management Team: Management team Market drivers Unique, disruptive Product Scalable business model Commercial proof of VC specific issues such as concept own portfolio Mean 5.

Level The sample variance of 1. This finding does not disprove the findings of Hall and Hofer, as they themselves found that VCs espoused Management Team to be the most important criterion, although they then subsequently found that VCs acted differently. This small gap between 1st and 2nd place is significant, as the next criterion, Product, is 18 points behind Market. Mason and Stark found VCs gave greatest emphasis to Market Issues with Entrepreneur ranking much lower in order of importance.

Zacharakis and Meyer also found, using conjoint analysis, that the entrepreneur is not as important as shown in previous studies, and that Market and competition considerations were more important. This indicates a need for the VC to see that there is potential for the venture to increase in scale. The importance of this criterion should however not be discounted.

One later stage investor said he would not invest in a venture without a proof of concept. His view, echoed by other VCs, is that all of the listed criteria are important and he would not invest unless all criteria were met. Nevertheless, it is still not unimportant, with a mean rating higher than 5 for all three elements A subsequent report by the same author Petty and Gruber, provides evidence for their finding that VC fund-related reasons are the overall most important decision criteria with respect to rejecting a deal.

Two of the respondents are associated with VCTs. Some VCs said that they do not have hard and fast rules about the balance of their portfolio or the fund phase and that they would always consider investing in a business if it was a good business. Other VCs said VC specific factors were rarely problematic for them due to the size of their funds. This was done because not all the firms interviewed made investments outside of the UK and as a result inclusion of this criteria would have skewed results.

It emerges therefore, that VC specific factors may be an important reason for VCs to reject a proposal. Consequently, the importance of this criterion should not be underestimated. Ranking of elements of criteria 5. Separating out the message from the person and the qualities of the person delivering it, is therefore very difficult.

VCs want to back good people; the question is how to spot them. Is it the case that VCs assess the wrong intangibles or do they attach inappropriate degrees of importance to the intangibles? This was found to be almost double as important as the field of education 2 Field of education- some engineering, some management Franke et al found 3 University degree- some or all team members that it was not necessary for all members of the 4 Leadership experience- all or some team members team to fulfil these criteria.

Interestingly Franke et al found that a mixed team between ages 25 and 45 fares much worse than a team consisting exclusively of founders between 35 and The criteria chosen by Gimmon and Levie and Franke et al do not encapsulate any element of personality or charisma. In search of the appropriate expression for such an element, the author considered Passion. Goodman, private investor and founder of E2. In the study, Passion was made to manifest through facial expressions, body movement, tone of voice, and other nonverbal clues, whereas Preparedness was made to manifest in content and substance of the presentation.

This either shows that passion as perceived, is not important, or that the definition of Passion is perhaps more nuanced than that defined. Preparedness was not included because the author did not believe that preparedness in itself, or even combined with Passion, would capture the personal characteristic required to persuade investors. An element of sincerity and credibility may be more valuable in persuading VCs. It is on this front that entrepreneurs have particular difficulty to persuade VCs that their new venture is plausible.

The very newness of their idea desirable distinctiveness may be considered undesirable to VCs by virtue of inability of this distinctive idea to fit into institutionalised conventions Navis, Credibility was not included because the writer felt that credibility in itself was insufficient General likeability is also deliberately expressed as such to ascribe to it the subjective element of judgment.

Question 2: In what order of relative importance do VCs rank team characteristics? The intention was to test whether VCs consider it important to like who they invest in, and if they do, how this element fared relative to the other elements. See discussion below. A kurtosis of 2. The finding that Relevant Industry Experience ranks in combined 1st place, is consistent with the study carried out by Franke et al which found Industry Experience to rank highest in their list This result is also consistent with the finding by Shepherd a which indicated that the most important criterion actually employed as opposed to espoused by VCs was Industry Experience.

Prior start up experience is considered the 3rd most important element. The high sample variance of 5. However, some VCs acknowledged that all successful entrepreneurs at one stage had no start up experience, so they would not consider this criterion as one of the most important. The high importance VCs attribute to this element is contrary to the previous finding by Franke et al that prior job experience 37 was the least important criterion for VCs.

Experience in Leading Teams is considered 4th most important. One VC commented that where this was lacking, they would bring in someone with experience. General Likeability is ranked 5th, with a very high standard deviation and high sample variance of 7, indicating the strongest difference of opinion and binary views on this criterion.

One VC explained that in his experience the entrepreneurs he liked least, were often the ones who turned out to be most successful. Six VCs ranked General likeability 8th and 9th respectively. Some VCs consider General Likeability essential, some do not. Still, those who do not consider it an essential element nevertheless need to be persuaded that the entrepreneur is credible.

One VC commented unprompted that is was very difficult for him to distinguish between Personal Motivation and General Likeability and that for him the two went hand in hand he ranked both equally, in combined 2nd place after Prior Start-up Experience. A high sample variance of 4. If an entrepreneur had no money to invest, VCs would not view failure to invest negatively.

It seems that the importance of the entrepreneur investing his own money depends very much on the personal circumstances, prior endeavours or successes of the entrepreneur. Acquaintance Among Team Members was considered the 2nd least important element, with a wide range of responses, from 2nd most important to least important element. The results are mixed because VCs distinguished between personal and professional acquaintance, with professional acquaintance considered very important and personal acquaintance a hindrance by some.

This appears to be consistent with Franke et al who found that personal acquaintance was considered less valuable than prior professional acquaintance. Field and Level of Education is ranked lowest in the list of elements, by a significant margin compared to the other elements. Some VCs commented that this element was not unimportant, but perhaps just not as important as the others. Yet another VC said that Education would only become important if there were weaknesses in other areas.

The reader is reminded that Franke only included 2 personal characteristics pertaining to the entrepreneur, in his list of criteria. Backing a 1st mover could prove expensive, as a new venture needs to educate the market about their product and persuade potential customers that the benefits of a purchase are greater than the risks Slater, However, Shepherd b reports that VCs assess a pioneer 1st mover as having a higher probability of survival than a late mover.

Question 3: Do VCs consider first movers more favourably than second movers when considering a potential investment? VCs were asked whether they favoured backing a first mover or a second mover. Two VCs said they prefer 2nd movers, and six expressed no preference.

The finding is therefore that VCs consider 1st movers more favourably than 2nd movers. Market criterion Figure 6: Preferences on market timing entry as expressed by interviewed VCs No preference One VC commented that at First mover venture stage it is impossible to Second mover be sure that the venture is in fact a first mover.

He often tells entrepreneurs that they have to assume that somewhere is another entrepreneur explaining exactly the same novel idea to someone else. VCs may be perfectly justified in their preference to back 1st movers. In markets where the pace of market and technology evolution is smooth i. In an environment where the pace of technology and market evolution is abrupt, the environment disables first mover advantage and later entry is facilitated.

Where either the pace of technology or the market is smooth, and the other abrupt, the net effects will be weaker than in the case where both are aligned Suarez, To determine whether preference to invest in 1st movers was related to the industry the VC invests in, the author attempted to divide the VCs into industries they tend to invest in.

Further research is recommended on this topic. How important is this non- appropriability in relation to the other elements of the product criterion? Persistence of the product Will a need for the product remain, or will the product become surplus to requirements, e.

Flexibility of product to adapt How important is it that the product is inherently flexible and easy to adapt, e. This is particularly true for industries where patents are essential to ensure the viability of a venture, such as in biotechnology or pharmaceutical products. MacMillan, found that the extent to which a product is non-appropriable was an essential product consideration for VCs. The aggregated results from the sixteen interviews are: Does the product satisfy a Non-appropriability- Persistence of the product- Flexibility of the product to need or want Intellectual property issues will a need remain adapt Mean 3.

A few VCs were also of the view that Flexibility to Adapt was a function of the team and not of the product inherently. Figure 8: Relative importance of elements of the Product criterion From Fig. The kurtosis is high at 3. One VC who ranked this element 3rd, explained that he did so because there may be an evolving need for a product; people do not always realise they need it. Non-appropriability came in 2nd place. Interviewees felt that the importance of this element depends on the size of the market, scale of the business and priority of the product.

On the whole, VCs were adamant that satisfying a need or want is far more important than Non-appropriability. Persistence of the product was considered the 3rd most important element in the Product criterion. One VC explained that he would probably want persistence of the market rather than persistence of the product. He accepted that products evolve, but what he would look for is a platform from which to launch derivative products.

Two VCs said they would expect persistence of the product up to the time of exiting the venture. However, with a value of Huyghe, found that VCs with more experience placed less emphasis on protection ability i. Non-appropriability when evaluating potential portfolio companies. Less experienced More experienced 32 Figure 9: Ranking of The timeframe within which an investment will generate returns has an effect on the portfolio structuring. This element is also a function of the venture considered, and so including it within VC specific criteria may be considered misplaced.

However, it is expected that a VC would be more likely to invest in a venture with a longer return horizon at the infancy of a fund, than towards the end of a fund. In that sense this element forms part of the VC specific criterion, albeit heavily influenced by the other elements: the Fund Phase and Portfolio. As soon as a first investment is made, the firm experiences residual effects and diminished available capital Petty, Over time the effects become more pronounced as VCs require investments that are an appropriate match for the remaining resources in the fund.

To ascertain the relative importance of pre-existing portfolio, fund phase and return horizon, the following Question was designed: Question 5: What is the relative importance to VCs of portfolio balancing, fund phase and timeframe within which the company will deliver a return on investment, within the VC specific criterion?

However, the aggregated order of VC specific criteria for the 16 interviewed VCs showed that Timeframe for Return on Investment was considered the most important element of the VC specific criterion, more important than portfolio balancing and fund phase. As such a true separation of these three elements is slightly artificial.

Effect of the stage of the investment company on ranking of criteria The importance of criteria used by VCs in assessing companies in different stages of development, i. At seed or early stage, it may be more important for a new venture management team to be stronger on technical experience in order to modify or tailor the technology to meet customer requirements Knockaert, One VC indicated that the order of his investment criteria would be different depending on the stage of the company he is looking to invest in.

He explained that for early stage investment, Market opportunity and the Product are paramount, without which he would not even consider investing in a Team. As soon as a Market has been established and Product developed, the Team becomes all important. This therefore led to a further question: Question 6: In making early stage investments, do VCs place more importance on Market and Product relative to other investment criteria? The values for the two groups were compared by running a regression; with a correlation coefficient of 0.

To determine whether the order of relative importance of criteria for the two different groups were the same, the interview results were aggregated and compared and summarised in Table 9 below. Commercial Proof of Concept is the only real notable exception: early investors tend to consider Commercial Proof of Concept quite unimportant, in 5th place, whereas later stage investors consider Commercial Proof of Concept in 3rd position.

Effect of phase of fund on ranking of criteria Petty, and Petty and Gruber, report that proposals submitted during the later phase of the fund were more likely to be rejected for VC reasons than those submitted in the early phase of the fund, VC-specific criteria increasing in importance over time.

These authors also report that deal proposals submitted during the earlier phase of the fund were more likely to be rejected for financial reasons than proposals submitted during the later phase of the fund. The VCs interviewed were asked whether the order of their criteria would be different when considering investments made in the first or latter phase of a fund. The responses are summarized in Fig.

One VC said he would probably invest in a less capital intensive venture towards the end of a fund. Three VCs said that towards the end of a fund they would want to balance out financial exposure created by their existing portfolio. One VC commented that towards the end of a fund VC specific factors would move up to 2nd position from 6th position in the list of criteria. Four VCs commented that their fund phase would not affect the order of importance of their investment criteria, due to different factors such as size of their funds, evergreen funds, or gating factors already applied at screening stage throughout the life of the fund.

Two VCs said that although the order of relative importance of criteria would not be different for investments made in the latter phase of a fund, they may be more flexible on some criteria towards the end of the life of a fund and make riskier investments within the latter phase, perhaps offsetting this risk by investing smaller sums of money.

However, another VC said that towards the end of a fund they may have learnt from mistakes made earlier in the fund and may therefore be stricter in their requirements. This is a good example of the risk aversion bias in that the VC is risk averse when responding to earlier losses.

The majority VCs 9 out of 16 considered that the order of importance of criteria would change in the latter phase of their fund with VC specific factors becoming more important in the latter phase of a fund, answering the question in the affirmative. So, is there really a difference between how experienced and less experienced VCs rank criteria? Question 8: Do experienced and less inexperienced VCs rank investment criteria in different orders of preference?

The total values for the ranked criteria for the sample of 8 VCs in each group, were compared by running a correlation. At a value of 0. A high correlation is to be expected due to the groups being relatively homogenous in that both groups are VCs. However, a high correlation does not ascertain whether the order of preference of criteria is different for the two groups. As such, the histogram Fig. VCs with less experience less than 10 years have a similar view on the relative importance of investment criteria to VCs with more experience more than 10 years.

More experienced VCs appear to place a higher premium on Team, Market and VC specific factors than their less experienced colleagues. To test whether less experienced VCs placed different values on the personal characteristics of entrepreneurs, the results from the elements of the Team criterion was compared, and the following histogram was produced: More experienced Less experienced Figure The combined values VCs from the two groups The results may simply be a factor of the small sample size, or it may be that less experienced VCs follow an established investment decision making process set by more experienced VCs.

The sum of Borda count values attributed to the different criteria for the two groups, are reflected in Fig. Comparing the relative rankings for the two groups show that VCs from larger firms consider criteria in different order of importance to VCs in smaller firms. VCs in larger firms consider Market to be slightly more important than Team; VCs in smaller firms consider Team much more important than Market.

The relative rankings are set out in Fig. Alternatively, or in addition, larger funds are perhaps more likely to invest in later stage companies at a time when the entrepreneurial team is beginning to consider its exit, or being encouraged to do so, which could potentially explain why Team is less important at that stage and consequently why Market has a greater relative importance.

If these reasons were true, one would expect a large overlap between the relative importance of criteria for later stage investments see paragraph 6 and larger size investments; however, as can be seen from Table 13 below, the order of importance for these two groups are different.

Following aspects are considered by a venture capitalist to determine the financial viability of the project:. Earnings growth potential b. Sensitivity of earnings to sales and margins c. Likely time lag between investment and return d. Likely impact on cash flow e. Expected value of the company at the notional of divestment f.

Portfolio analysis consists in examining the venture capitalists portfolio balance at the time the investment proposal is being considered. Size of investment: The amount of money per investment has a significant impact on the size of the portfolio. Moreover, if the venture capitalist builds up a very large portfolio, hands on management will be difficult.

Stage of development: A venture capital portfolio will typically consist of some companies, which are in the startup phase, some companies in a development stage and others in the mature phase of its life cycle, such as MBO investments. Geographic Location: In order to reach an acceptable level of portfolio diversity and volume, many funds will go in search of foreign investments. The basic principle of a successful international investment policy is to join a syndicate with a local fund, which will have a superior understanding of the market, and also the social investment and tax environment.

Industry sectors: This is fourth on portfolio diversification. Venture capitalists attempts to diversify the portfolio in order to offset problematic or slow growth investments. Divestment calls for venture capitalists to have a clear idea about the method, the timing and the valuation of the company upon divestment. There are four principal means by which ventures capitalists realize investments.

They are:. Trade sale: The process of selling the investment to a company in the trade, i. A trade sale is in the form of an unexpected and unsolicited bid.

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JEAN RIFFLART VERLINVEST INVESTMENT

If these reasons were true, one would expect a large overlap between the relative importance of criteria for later stage investments see paragraph 6 and larger size investments; however, as can be seen from Table 13 below, the order of importance for these two groups are different. Another possible explanation could be that larger funds may have more members of staff and more processes that require VCs to assess the Market over Team; it may be that knowledge of the Market could be easily shared amongst VCs in larger firms whereas the subjective assessment of Management Team is not undertaken by the more junior members of staff.

VCs with different types of investors may therefore see investment criteria differently. Government backed funding for UK VCs has increased significantly over the last few years. Although publicly backed funds have historically underperformed private funds in the UK 39 Lerner, , this returns gap appears to have been narrowing latterly, indicating an improvement in the running of public funds.

Deloitte also found that VCs surveyed were looking to governments as their financial partners, with two-thirds of VCs seeing government investment increasing. VCTs is another type of VC that may see the relative ranking of investment criteria different than their government backed or ordinary privately backed VCs due to the legislative constraints VCTs operate under.

With large numbers of investment made by VCTs and Government backed VCs, it is important for entrepreneurs to know what these VCs look for and whether they would rank certain criteria of higher importance than others. To ascertain whether Government backed VCs or VCTs ranked investment criteria in different order of preference than privately backed VCs, responses from the 16 VCs were divided into three groups.

Only 3 VCs from the sample were Government backed wholly or partly ; two were VCTs and the remainder privately backed. The author cautions that the above rankings are the average rankings from the interviewed VCs, and due to the small sample size for the Government backed VCs and VCTs the aggregated results may not be representative. Nevertheless, the findings are food for thought, and further research on these differences is recommended. Sources suggest this returns gap can be attributed to a variety of reasons including fund size and involvement in portfolio companies In fact, Hege et al found that US venture funds investing in Europe do not create more value than their European peers, perhaps indicating that the selection skills do not account for the difference in performance.

Literature does not support an assertion that VCs from different cultures rank criteria differently. Shepherd a carried out his survey on investment criteria on VCs in Australia. The criteria which he used and his reported findings on the relative importance of these criteria were not, on the face of it, limited to Australian VCs. To test whether there were in fact differences in ranking of criteria by VCs from different cultures, the following Question was developed: Question All else equal, do VCs from different cultures rank investment criteria in different orders of preference?

With full awareness of the limitations of comparing 14 UK responses with one Canadian and one Pan- European fund, the author compiled the following comparison of the importance of investment criteria by VCs in different countries: 43 The factors considered most important by VCs in Hong Kong include Team: A well established relevant track record, degree of leadership ability displayed in the past, Ability to well evaluate and react to risk and Capability of sustained intense effort Market: Access to well-established distribution channel, Sustainability to anticipated competition, A significant growth rate for the target market and Demonstrated market acceptance for the product Product: Product development to the point of a functioning prototype and Protection of the product Financial considerations: Ease of making the investment liquid These factors were not ranked in order of importance relative to each other.

Although these factors are not identical to previous studies, such previous studies of criteria used by VC in one country, are not identical. UK Unique, disruptive Product 4 3 4 average is an average of 14 responses Commercial proof of concept 3 3 2 Strong market drivers 5 5 5 From Table 15 it can Scalable business model 3 3 3 be ascertained that Management team 6 6 6 VCs in the UK, VC specific issues such as own portfolio 1 1 1 Canada and Europe consider Management Team the most important criterion, followed by Market Drivers.

All VCs agree that VC specific issues is the least important criterion. Furthermore, with most countries following the US way of carrying out VC investments, a high degree of convergence with the US model is likely. In that respect, this finding seems correct. However, the author feels the data is insufficient to provide categorical evidence and suggests this topic as an area for further research.

Lu provides evidence that foreign VCs operating in China place a greater importance on market characteristics than on human and company characteristics. This finding places a nuance on the earlier question whether VCs from different cultures rank criteria differently; perhaps future research could also consider whether VCs operating in a different culture, rank criteria differently than they do when they invest in their own country.

Other factors around the beginning and end of the VC investment process Cumming reports anecdotally that VCs he has spoken to never look at unsolicited proposals. So what happens to the unsolicited proposals? Question Do VCs use different processes to consider business proposals received through referrals from within their existing networks than they do when considering proposals received cold? From the VCs interviewed, all look at unsolicited proposals, but would take more seriously the proposals from warm referrals.

Universally, the VCs interviewed are of the view that warm referrals are usually of a better quality. The author surmises that a higher quality of proposals through referrals could be attributed either to the assistance of the referrer, or perhaps to the fact that entrepreneurs with better proposals tend to have more connections. The implications of this finding for entrepreneurs are that entrepreneurs should build up a strong network and should use this network for assistance and introductions at the time when they require funding.

Eleven of the sixteen VCs use the same process for referrals and cold proposals, the other five use different processes. Some VCs commented that perhaps they would not respond as quickly as they would to warm referrals, but they would always respond. In a study carried out by Kaplan et al, , it was found that Kaplan et al found that This statistic brought into the question whether the interviewed VCs use anti-dilution measures and as such this Question was designed: Question Do UK VCs tend to use anti-dilution measures in their investment contracts?

Because this question is UK focused, the two VCs from other countries were excluded from the sample. Out of the 14 UK VCs, three VCs said they do not 44 There are two basic types of price-based anti-dilution mechanisms; full ratchet and weighted average. Full ratchet dilutes the shares by entitling the first investor who included these measures in the contract to get the same price per share as the new investor, regardless of the number of shares presented.

Weighted average takes into account the lower price and actual number of shares issued in the down round. Broad-based weighted average takes into account all the shares in issue, not just those held by investor 1. Broad-based produces a better result for the owners, and worse for the first-round investor. Of the VCs who use anti-dilution measures with varying degrees of frequency , only two use full ratchet; the remaining tend to use weighted average.

Not all VCs indicated whether they used broad-based or narrow- based, but the ones who did indicate, use broad-based weighted average. It is therefore apparent that the majority of UK VCs interviewed, use anti- dilution measures with varying degrees of frequency. It was also found that full ratchet anti-dilution measures are unusual. Comparing the results from the survey with the results of the Kaplan et al study, it is clear that the UK VCs do not use anti-dilution measures as frequently as their American counterparts.

Interestingly, the two VCs from other jurisdictions both indicated that they use anti-dilution measures, including full ratchet The implication of this finding for entrepreneurs is that UK VCs are not as wedded to anti-dilution measures as may be commonly accepted. Some VCs will always insist on using anti-dilution measures, but others may be open to negotiations to exclude anti-dilution measures. Entrepreneurs are advised to open discussions on this front with their VC in appropriate circumstances.

Limitations The research for this paper was undertaken by means of interviews that are prone to post hoc recall and rationalization biases. Past studies used interviews, conjoint analysis or verbal protocol analysis; the author chose to carry out interviews firstly because it allows VCs to reflect on years of experience, probably giving a far more accurate picture of the relative importance of assessment criteria they use on a daily basis, and secondly because of the logistical difficulties and artificiality associated with a conjoint or verbal protocol analysis method.

A limitation lies in the splitting of the data gathered from early and later stage investors. The sample size of the study is relatively small at 16 responses. Findings within such a small sample size may not be indicative of the VC population, as a normal distribution cannot be assumed.

Suggestions for further research The author found VC specific factors to be an important criterion, but the criterion was found to be the least important criterion used by VCs in their decision making. A comparison of ranking of order of importance by VCs in other countries would also be useful. Conclusions and recommendations This paper is important for entrepreneurs, VCs and the academic investigation of VC decision making because it provides a new data set, a considered refinement of existing criteria used in other studies and an in depth statistical analysis of the importance VCs attach to those criteria.

This research is highly relevant particularly for UK VCs and entrepreneurs, being the only study the author is aware of that focuses on UK VC investment criteria. The paper confirms the overriding importance of Management Team with Market ranking 2nd in order of importance. Entrepreneurs should thus ensure that the team consists of the right people see below for a discussion on team characteristics and that they know their market.

The importance of Product, Commercial Proof of Concept and Scalability of Business should not be underestimated, despite their lower rankings relative to Team and Market. Some VCs will not invest unless all of the six criteria are met. VC specific factors are ranked in 6th place. Despite such a low ranking, the author cautions entrepreneurs that VC Specific Factors is a significant reason for rejecting investment proposals.

Entrepreneurs should be conscious that VCs in considering proposals would consider their existing portfolio within their fund, the fund phase, and the timeframe within which an investment is expected to generate a return on investment. Entrepreneurs should therefore spend time learning about the VCs to whom they are pitching in order to tailor their proposals accordingly. Within some of these six listed criteria, VCs consider certain elements more important than others.

General Likeability achieves a mid-field ranking, the result of strong opposing responses on the relative importance of this criterion. Most VCs feel it is important to like who they invest in, mostly because they the VCs have to work with the entrepreneur for a long period of time, or they have to believe that the entrepreneur will be able to sell their company to prospective clients and that the entrepreneurs can retain staff.

From the interviews it is clear that VCs consider professional acquaintance of much higher importance than personal acquaintance. The significance of these findings for entrepreneurs is that a combination of factors are important to VCs in considering potential investment and the entrepreneur should ensure that a wide skill set is presented to the VC; within this skill set Field and Level of Education is least important, but without education VCs may be concerned that the entrepreneur is not equipped to handle the challenges of a new venture.

The data suggests that some VCs prefer first movers over second movers when considering a potential investment, but many VCs have no preference. The author suggests that the reason for a preference for 1st movers may be related to, or dependent on, the industries within which VCs operate. Entrepreneurs should know their market and be aware that VCs will anticipate challenges associated with both 1st and 2nd movers. However, non-appropriability is of very high importance for certain products or within certain industries.

In considering new investments, VCs consider the timeframe within which the company will deliver a return on investment to be more important than the phase of the VC fund or pre-existing portfolio. Entrepreneurs should have a clear vision of the returns the VC can expect. VCs with different types of investors attach different levels of importance to investment criteria.

VCs managing larger funds will view Market as the most important criterion, and they also appear to consider VC specific factors almost twice as important as their counterparts in the smaller firms do. VCs managing smaller funds feel Management Team is the most important criterion. Early stage investors consider Commercial Proof of Concept 5th in order of importance, whereas later stage investors consider Commercial Proof of Concept the 3rd most important criterion.

If the entrepreneur approaches a VC when the company is still in an early stage, the Commercial Proof of Concept will not be as important as it becomes for a later stage company. Entrepreneurs should nevertheless be reminded that although VCs may attribute higher importance to certain criteria, they are all important and VCs may not invest unless they are satisfied on all these criteria.

The paper found that there is no difference in ranking of relative importance of criteria by more and less experienced VCs. There is also no difference in order of importance of Team characteristics between more and less experienced VCs. This finding makes a important contribution to the literature in that it is contrary to previous research which proved that less experienced VCs consider education more important than their experienced colleagues.

Entrepreneurs should be aware that VCs with more experience do not consider criteria in any different order of preference to VCs with less experience. The limited sample indicates that there is no significant difference between the relative rankings of VCs from the UK, Canada and Europe. However, the author considers that the small sample size does not provide sufficient information to consider this question suitably and further research is recommended.

With respect to anti-dilution measures, the author found that UK VCs tend to use anti-dilution measures more infrequently than their American counterparts are reported to do. During negotiations of the legal agreements, entrepreneurs should not assume that all UK VCs use anti-dilution measures and entrepreneurs should negotiate where appropriate.

Business Insights. Business Insights Ltd, Chen, X. Cumming, D. New Jersey: Kolb Series in Finance, Di Gregorio, D. ECVA Barometer. Summer Financial Times. FT, 25 May Franke, N, M. Gruber, D Harhoff, and J Henkel. Fraser-Sampson, G. Private Equity as an Asset Class. Fulghieri, P. Gilovich, T.

Griffin, and D. New York: Cambridge University Press, Gimmon, E. Sharpe Inc. Gladwell, M. Blink: The Power of Thinking without Thinking. Hall, J. Hege, U. Palomino, and A. Hisrich, R. Hudson, E. Huyghe, A. Imamuddin, K. Kalyanaram, G. Kaplan, S. Martel, and P. January Keeley, R. H and Roure, J. Knockaert, M. Kunkel, S. San Francisco, August Lerner, J. Venture Capital and Private Equity. A Case Book.

New York, N. Lieberman, M. Lu, H. Evidence from China. MacMillan, I. Mason, C. Meyer, G. Moser, P. Evidence from Nineteenth Century's World Fairs. Muzyka, D. Birley, and B. National Venture Capital Association. Navis, C. Payne G. Petty, J. Poindexter, E. The efficiency of financial markets: the venture capital case. Practical Law Company. Robbins, S.

Judge, and T. Pearson, Shepherd, A. Shepherd, D. A, and E. Thousand Oaks: Sage, Silva, Jorge. Slater, S. Small Business Service. March Smart, G. Soderblom, A. Stewart, T. Intellectual Capital. New York: Doubleday, Suarez, F. Sullivan, P. The Telegraph, 15 February Tyebjee, T.

Wells, W. Venture Capital decision making. Unpublished doctoral dissertation, Pittsburgh: Carnegie Mellon University, Borda Count. Wilson, J. Addison Wesley Publishing Company , April Wong, A. NESTA, Zacharakis, A. Zutshi, R. Tan, Allampalli D.

However, the picture is slightly rosier when the returns of the top quartile of VC funds are considered, with returns remaining above zero throughout the financial crisis. For a short period of time the UK top quartile returns even surpassed that of the US, but this did not last. The level and value of VC investment as a proportion of Private Equity investment in its totality, is discussed and assessed.

All data has been obtained from the sources as specified in the text. The data was then assimilated and the bar charts in the paper were drawn from the data. The total PE investment figures include all of the aforesaid. In order to ascertain the trend of investment by VC firms in different countries, investment data for the year to date was downloaded from Thomson One Banker on 21 August The data and comparisons of venture capital investments within the wider private equity sphere is compared by location nation of the firm making venture capital investments, e.

Note that the data is gathered based on the location of the firm making the investment, and not based on the location of the company in which the investment is made. By contrast, the value of VC investments by US firms have been increasing steadily over the last 5 years.

Value of PE investments by US firms were particularly high in From these figures it can be deduced that firms seem to be investing larger sums in a smaller number of companies. Is this purely perception or is it fact? And if fact, why is this so? In the UK, both the number and value of VC investments made, have been reducing over the last 5 years. Again, it is too early to tell whether will show an increase in investment. UK Number of Investments No. This indicates smaller amounts of investments per investment made, directly opposite to the position in the US.

US fund sizes are consistently larger, allowing the US funds to make larger investments and in a larger amount of companies. Their size also places them in a better position to make more follow-on investments that their European counterparts US investors also tend to invest with a larger number of co-investors than European funds US funds are more specialized, concentrating investment in fewer sectors.

The trend towards high specialization can also be seen in UK and continental European funds, but are not as pronounced there. From a higher proportion of European funds have chosen to invest locally, while US funds are becoming more global, with a larger share coming to Europe. The UK has become an attractive destination to domicile VC funds. Landier found that US VCs spend a large amount of time learning about the technological aspects of an investment both pre and post first-time financing.

A study of US venture capital firms by Laine found that large fund management firms have significantly higher rates of exit success, perhaps due to a better reputation as quality certifiers. However, the downsides of larger funds include diversification that may not be for the benefit of LPs and increasing the difficulty of finding good deals. Value of VC investments were very high in relative to the value of total PE investment. China Number of Investments No. However, values of investment have decreased sharply from the highs of , indicating smaller investments are being made by PE firms.

VC firms are making even smaller investments on average, as indicated by their steady numbers, but much lower values. The main reasons for this slow progression, are argued to be the slow growth in Pakistan as a whole, the lack of qualified VCs and the cultural difficulties with accepting VC Imamuddin January Entrepreneurs in Pakistan are said to be less motivated to raise venture capital because of their family-owned and cultural values that discourage entrepreneurs from sharing ownership and control with an outsider.

Furthermore, the fear of failure in Pakistan, is advanced as a further reason. Imamuddin January Russia: Before , Russia and the CIS outperformed all other private equity markets over the preceding 3, 5 and 10 years. The financial crisis did however have a large impact on exits and transactions and consequently fundraising in Russia. The consumer goods and services market was the largest sector for new investment in , representing The consumer-driven, banking and pharmaceuticals sectors are identified as key growth areas in Government-funded programmes is a growing trend in Russia, particularly with the Russian Corporation of Nanotechnologies investing in commercialization of nanotechnology projects Practical Law Company India: Private Equity in India has not yet evolved to management buy-outs, public to private and other similar deals.

Hong Kong: Investments by Hong Kong firms is especially high in the financial services sector Buy-outs were however still the largest segment in terms of capital under management in Figure VC Investment statistics worldwide by industry Source: Thomson One Banker as at 21 August , with expressed as year to date figures Deloitte carried out a study on VCs and inter alia asked them how they expect their investments to evolve by industry over the following 3 years.

Can you roughly estimate of the number of business plans you have reviewed over the course of your career in venture capital? Or years of experience? What percentage of business plans submitted to your firm do you eventually invest in? Do you use different processes to consider business plans submitted cold for example on your website from business plans referred through your network? When considering potential investments, in what order of preference would you rank the following groups of criteria: a.

Product- unique, disruptive technology b. Commercial proof of concept c. Strong Market Drivers d. Scalable business model e. Management team f. VC specific issues such as own portfolio 5. Would the order be different for early first half and late phase second half fund investment? If so, how? Within the group of criteria 'Management Team', please rate the following criteria on a scale of , 1 being unimportant, and 10 being extremely important: Entrepreneur investing own money Prior start up experience Relevant Industry Experience Field and level of education Experience in leading teams Acquaintance among team members Personal motivation General likeability 7.

Entrepreneur investing own money b. Prior start up experience c. Relevant Industry Experience d. Field and level of education e. Experience in leading teams f. Acquaintance among team members g. Personal motivation h. General likeability 8. Within the group of criteria 'Product', please rate the following criteria on a scale of , 1 being unimportant, and 10 being extremely important: Does the product satisfy a need or want- Non-appropriability- Intellectual property issues Flexibility of the product to adapt Persistence of the product- will a need remain 9.

Within the group of criteria 'Product', please rank the following in order of preference: a. Does the product satisfy a need or want b. Non-appropriability- Intellectual property issues c. Flexibility of the product to adapt d. Persistence of the product- will a need remain Within the group of criteria 'VC specific', please rate the following criteria on a scale of , 1 being unimportant, and 10 being extremely important: Portfolio Estimated timeframe within which investment will generate revenue Fund phase Within the group of criteria 'VC specific', please rank the following in order of preference: a.

Estimated timeframe within which investment will generate revenue c. Fund phase Within the group of criteria 'Market', would you rather invest in a first mover or a second mover? Would you consider an investment more favourably or less favourably if the entrepreneur is prepared to work without a salary until the business is profit generating?

Do you use anti-dilution measures for investments? Do you use broad- based weighted average or full ratchet or other measures? Can you explain whether and how your own criteria for evaluating investments, and the order of preference of those criteria, have changed over the course of your career? General comments on the UK VC market and whether it has changed over the course of your career.

Expansion as Investment Focus - This stage can be used by funds that are managed by both buyout firms and venture capital firms. For venture capital firms, Expansion stage funds invest into portfolio companies that have products and services that are currently available, and require additional capital to expand production to increase revenue. For buyout firms, Expansion stage funds are sometimes referred to as growth or growth equity funds.

In this case funds typically only invest in portfolio companies using equity usually to expand operations on a national or international stage, possibly through acquisitions of smaller or similarly sized companies, or increased production. Later Stage as Investment Focus - This stage describes funds that make investments into portfolio companies that have an already established product or service that has already generated revenue, but may not be making a profit.

Later stage funds make the last round of investments in portfolio companies before an exit in the form of an IPO or acquisition by a strategic partner. Related Papers. By Geoff Gregson. By Jeffrey Petty. Mixed signals: why investors may misjudge first time high technology venture founders.

By Jonathan Levie. By Kamran Hashmat. Do investors and entrepreneurs match? By Friedemann Polzin. Download pdf. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. History: A brief of the company, including date of incorporation and a summary of progress. Management: The quality experience strategy and motivations of management directors and existing shareholders.

Markets: The markets which the company serves, including size and nature of the industry, location and characteristics of customer base, potential competition and unique selling points 5. Manufacturing: Manufacturing and operational aspects of the business, including a description of the technology used, access to sources of supply, manufacturing capacity and the premises owned or occupied. Following aspects are considered by a venture capitalist to determine the financial viability of the project:.

Earnings growth potential b. Sensitivity of earnings to sales and margins c. Likely time lag between investment and return d. Likely impact on cash flow e. Expected value of the company at the notional of divestment f. Portfolio analysis consists in examining the venture capitalists portfolio balance at the time the investment proposal is being considered.

Size of investment: The amount of money per investment has a significant impact on the size of the portfolio. Moreover, if the venture capitalist builds up a very large portfolio, hands on management will be difficult. Stage of development: A venture capital portfolio will typically consist of some companies, which are in the startup phase, some companies in a development stage and others in the mature phase of its life cycle, such as MBO investments.

Geographic Location: In order to reach an acceptable level of portfolio diversity and volume, many funds will go in search of foreign investments. The basic principle of a successful international investment policy is to join a syndicate with a local fund, which will have a superior understanding of the market, and also the social investment and tax environment. Industry sectors: This is fourth on portfolio diversification.

Venture capitalists attempts to diversify the portfolio in order to offset problematic or slow growth investments. Divestment calls for venture capitalists to have a clear idea about the method, the timing and the valuation of the company upon divestment.

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