Criteria Used by Venture Capitalists to Evaluate New Venture Proposals

Abstract

In 1981, Tyebjee and Bruno examined the criteria usedby venture capitalists (VCs) when they evaluate venture proposals. Thisresearch expands on the earlier work, using a broader group of VCs. Aquestionnaire mailed to all members of the National Venture Capital Associationand all members listed in Venture Magazine's 1983 Directory of VentureCapitalists yielded 102 responses. The ten criteria most frequently rated as essential by venture capitalists are:(1) the entrepreneur needs to be capable of sustained intense effort, (2) theentrepreneur must be thoroughly familiar with the market, (3) the venturecapitalist requires at least ten times return on the investment within 5-10years, (4) strong leadership skills shall have been demonstrated in the past bythe entrepreneur, (5) the entrepreneur must have the ability to evaluate andreact to risk well, (6) the investment can easily be made liquid, (7) thetarget market enjoys a significant growth rate, (8) the entrepreneur has atrack record relevant to the proposed venture, (9) the venture is articulatedwell, and (10) the product is proprietary or can otherwise be protected. Ingeneral, personality and experience concerns dominate the financial criteria,which in turn are regarded as more important than product or market criteria.(SFL)

Keywords: Market characteristics, Product characteristics, Decision making, Individual traits, Return on investment, Leadership, Market growth, Risk orientation, Startups, Liquidity, Investment criteria, Founders, Risk assessment, Venture capitalists