How Do Venture Capitalists Make Decisions?
Paul A. Gompers
Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
University of British Columbia (UBC) - Division of Finance
Steven N. Kaplan
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
Ilya A. Strebulaev
Stanford University - Graduate School of Business; National Bureau of Economic Research
August 1, 2016
Stanford University Graduate School of Business Research Paper No. 16-33
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 477/2016
We survey 885 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions across eight areas: deal sourcing; investment decisions; valuation; deal structure; post-investment value-added; exits; internal organization of firms; 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).
Number of Pages in PDF File: 95
Keywords: venture capital, entrepreneurship
JEL Classification: G24, G31
Date posted: June 29, 2016 ; Last revised: February 2, 2017