Venture Capital Pre-Investment Decision Making Process: An Exploratory Study in Malaysia

Abstract

Venture capital is an alternative source of funding for SMEs in this country. Recognizing the importance of this industry toward economic growth, Malaysian government has initiated various strategic plans. Despite the promising growth of venture capital market here, past empirical findings reveal that the performance of venture capital backed companies (investee companies) over long run has been relatively poor, especially after venture capitalist exit. Thus, there is a need to understand the decision-making process practiced by Malaysian venture capitalists. Most decision making process evolve from classical decision-making model, hence current study purports to find the disparity between the current practice and classical venture capital decision-making model. The current study incorporates an exploratory research through survey of 16 venture capitalists. Findings reveal there are significant similarities in the decision making procedure and investment criteria used to select investment deal with the classical model. Similarities noted in the last two stages of decision-making. As for investment criteria, greater importance is given to management integrity and exit opportunity rather than to the business idea. Findings also reveal that VCs experience does not correspond to expertise in decision-making.

Keywords: venture capital decision making process, investment criteria, investment stage, investment sector, investment timing

JEL Classification: G24, M13, D81, L20