Venture capitalists' investment criteria in technology-based new ventures

The objective of this multi-stage study is to explore and identify the salient investment criteria used by venture capitalists (VCs) in technology-based new ventures, at the evaluation stage. In Stage #1, the author established a network of VCs and found that they are approachable, and the VCs were willing to co-operate in this study. In Stage #2, the author conducted a case study in the form of participant observation on a technology-based new venture developing Internet electronic commerce software. The results include the process and set of investment criteria used by two venture capital firms that invested at the early stages of this venture. In Stage #3, using semi-structured interviews, the author further explored the process and investment criteria used by a sample of 18 VCs in Silicon Valley (California) and Boston (Massachusetts) for technology-based new ventures. The criteria from Stages #2 and #3 were content analyzed and resulted in the development of the web-based surveys in Stage #4 (www.venturecapital2000.com).; All the salient findings from Stages #2 and #3 were summarized into six categories (and are presented here in order of decreasing importance to the VCs): Characteristics of the new venture's (1) management team, (2) target market, (3) offering (product or service), (4) competitive positioning within its environment, (5) capital payback projections, and (6) business plan. In Stage #4, the author identified the salient investment criteria used by 100 VCs (50% response rate) and the degree of tangibility of the criteria from 12 Canadian VCs (100% response rate). Of the six categories, "the management team" generated the highest number of important criteria (means ≥5.5), a total of 30 (and were mostly tangible in nature, mean tangibility ≥4.5). This total approaches 60% of all the important criteria. The remaining account for 21 of the criteria (all tangible in nature), and the most salient among them is "venture offering is driven by market demand" (mean = 6.23). The majority of salient criteria are related to management team and market, and is customer focused. The only intangible criterion was, "the ability to effectively manage change within the new venture" (mean tangibility = 3.17). The most frequent source of deal origination is "referral by a trustworthy source to the VC" (64%).; Most entrepreneurs have difficulty in raising venture capital; VCs claim that there are very few good deals to invest in; there is a limited amount of venture capital available for new ventures at the early-stages; and there are more failures of technology-based new ventures than successes. One way of increasing the likelihood for an entrepreneur of a technology-based new venture to raise venture capital is to understand the investment criteria used by VCs and their investment preferences. Previous studies have expressed the importance of the management team to the investment decision of the VC. This study has explored the criteria that are of importance to VCs within the management team. This study also provides insight into how VCs and some of their peers make investment decisions in the California and Massachusetts areas, where VCs are considered to set the trends for the venture capital industry.