Venture Capital Decision-Making

Paper Summary:

This paper explores decision-making among venture capitalists (VCs). It discusses the factors that are common to investments by the VCs in the decision-making process and the attributes that the VC investor most desire in managers of the business venture. The paper focuses on the varied nature of these attributes. The paper contains two figures.

From the Paper:

"Attributes that the VC investor most desire in managers of the business venture include the following attributes: (1) Personal integrity; (2) A good record of accomplishment; (3) Realistic and able to identify and mitigate risks; (4) Hard-working and flexible with a thorough understanding of the business; (5) Flexibility; (6) leadership abilities. (Hisrich, 1994) Hisrich states that there are stated to be three components to returns: (1) There must be an exit opportunity present; (2) The investment must offer the potential for a high rate-of-return; (3) The venture must offer the potential for a high absolute return. (Hisrich, 1994) Hisrich additionally relates that the decision-making process contains six specific stages with the first being 'Origination'. The second stage is the 'VC Firm-Specific Screen' with the third stage being the 'Generic Screen'. The fourth stage is the 'First-Phase Evaluation' in which the VC begins gathering information concerning the proposal."

Sample of Sources Used:

• Kaplan, S. & Schroar, A. 2003. Private Equity Performance: Returns, Persistence and Capital Flows. MIT Sloan Working Paper No. 4446-03; AFA 2004 San Diego Meetings.
• Cochrane, John H. The Risk and Return of Venture Capital. Working paper, University of Chicago, 2001.
• Kinnunen, Harri (2004) Institutional Investor's Decision Making Criteria for Investing in Venture Capital Funds. Frontiers of E-Business Research 2004. Online available at: http://www.ebrc.info/kuvat/695-709_04.pdf
• Patel, Pankaj and D'Souza, Rodney (2008) Uncovering Knowledge Structures of Venture Capital Investment Decision Making. A Working Paper for SBA Office of Advocacy. Jan 2008. Online available at: http://www.sba.gov/advo/research/rs315tot.pdf
• Mishra, Sanjay, Kemmerer, Benedict, and Shenoy, Prakash P. (2001) Managing Venture Capital Investment Decisions: A Knowledge Based Approach. Available online at: http://web.ku.edu/~pshenoy/Papers/BKERC01.pdf

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