How do venture capitalists make decisions?

By Paul A. Gompers, Will Gornall, Steven N. Kaplan, Ilya A. Strebulaev. Journal of Financial Economics, 2020

636 citations recorded by the source corpus.

We survey 885 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions across eight areas: deal sourcing; investment selection; valuation; deal structure; post-investment value-added; exits; internal firm organization; and relationships with limited partners. In selecting investments, VCs see the management team as more important than business related characteristics such as product or technology. They also attribute more of the likelihood of ultimate investment success or failure to the team than to the business. While deal sourcing, deal selection, and post-investment value-added all contribute to value creation, the VCs rate deal selection as the most important of the three. We also explore (and find) differences in practices across industry, stage, geography and past success. We compare our results to those for CFOs (Graham and Harvey 2001) and private equity investors (Gompers, Kaplan and Mukharlyamov forthcoming).

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/e14a0c33473bb83db0f7cb1748afe0416b41a096

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Citations in the corpus

Private equity investment criteria: An experimental conjoint analysis of venture capital, business angels, and family offices (2019, background): “Recently, Gompers et al. (2019) report AC C EP TE D M AN U SC R IP T that 95% of the VCs in their survey mention the management team as an important factor, 47% as the most important factor.”
Institutional investors and post-ICO performance: an empirical analysis of investor returns in initial coin offerings (ICOs) (2020, positive): “Prior research in entrepreneurial finance shows that founder and team characteristics are crucial selection criteria for institutional investors (e.g., Block et al., 2019; Gompers et al., 2020).”
What Matters to Individual Investors? Evidence from the Horse's Mouth (2018, neutral): “Some notable recent exceptions in corporate finance that each seek to test a wide 4 range of academic theories in an area are Graham and Harvey (2001), Brav et al. (2005), Graham, Harvey, and Rajgopal (2005), Gompers, Kaplan, and Mukharlyamov (2016), and Gompers et al. (2016).”