How Do Venture Capitalists Make Decisions?

Gompers, Paul A.; Gornall, Will; Kaplan, Steven N.; Strebulaev, Ilya A.

doi:10.2139/ssrn.2801385

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How Do Venture Capitalists Make Decisions?

Stanford University Graduate School of Business Research Paper No. 16-33

European Corporate Governance Institute (ECGI) - Finance Working Paper No. 477/2016

95 Pages Posted: 29 Jun 2016 Last revised: 21 Sep 2022

See all articles by Paul A. Gompers

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Will Gornall

University of British Columbia (UBC) - Sauder School of Business

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); University of Chicago - Polsky Center for Entrepreneurship

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

There are 2 versions of this paper

Date Written: August 1, 2016

Abstract

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).

Keywords: venture capital, entrepreneurship

JEL Classification: G24, G31

Suggested Citation: Suggested Citation

Gompers, Paul A. and Gornall, Will and Kaplan, Steven Neil and Strebulaev, Ilya A., How Do Venture Capitalists Make Decisions? (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, Available at SSRN: https://ssrn.com/abstract=2801385 or http://dx.doi.org/10.2139/ssrn.2801385