Entrepreneurial Uncertainty and Expert Evaluation: An Empirical Analysis

Abstract

This paper empirically examines the evaluations of 537 ventures in high-growth industries performed by 251 experienced entrepreneurs, investors, and executives. These experts evaluated ventures by reading succinct summaries of the ventures, without meeting the founding teams, and their evaluations were not disclosed to the entrepreneurs. We find that experts can differentiate among early-stage ventures on grounds of quality beyond the explicit venture and entrepreneur characteristics contained in the written summaries. They can only do so effectively, however, for ventures in the hardware, energy, life sciences, and medical devices sectors; they cannot do so for ventures in the consumer products, consumer web and mobile, and enterprise software sectors. Our results highlight sector-specific heterogeneity in the information needed to effectively screen ventures, a finding that has implications for the design of optimal investment strategies.

Keywords: entrepreneurial uncertainty, early-stage firms, screening, expert evaluation, venture financing

JEL Classification: G32, L26, M13, O31