Venture Capital Investment Decision Making

Entrepreneurs constantly seek capital for new and existing ventures although they face considerable constraints in obtaining financing. Venture capital from outside investors has been considered an important driver in the startup and growth of entrepreneurial firms. Understanding the specific investment criteria for venture capital funding is of foremost importance, since this may substantially improve these firms’ chances of acquiring funding.

Venture capitalists (VCs) may be willing to fund

a marginal team with better venture potential

In other words, entrepreneurs need not only to assemble an effective team, but also to clearly demonstrate the venture potential of their proposed business. This finding contrasts with most prior studies, which identify the venture team as the key funding criterion.

The Small Business Research Summary Findings include:

• The findings suggest that while a venture team’s composition and ability are a minimum requirement in the consideration of a venture capital investment and a major factor in explaining why a business plan gets rejected, these features are not significant in explaining why a business plan gets funded.

• The study implies that venture potential is a better indicator of business plan funding than venture team quality and that VCs have similar knowledge structures and preferences when it comes to funding and not funding actual business plans.

• The researchers analyzed the relationship between rates of return and factors such as venture team quality and venture potential. The analysis finds that a good venture team has decreasing returns even for funded ventures, but favorable competitive conditions and market potential of a business plan have increasing returns

Venture Capital Investment Decision Making

Download a full copy of this report is available at: US SBA

The research summary can be found at: US SBA

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