Venture Capital Opportunity Selection Decision Criteria: An Example

Transcription

1 Venture Capital Opportunity Selection Decision Criteria: An Example Daniel F. Muzyka University of British Columbia Daniel F. Muzyka, 2003 Research Methods ) Individual Interviews ) Decision Model (Tradeoff) Questionnaire ) Extended Interviews ) Individual Decision-Model ) Groups Of Like Decision-Makers ) Product-Market Factors: 5 Degree Market Already Established 5 Market Size 5 Seasonality Of Product-Market 5 Sensitivity To Economic Cycles 5 Market Growth And Attractiveness 5 Uniqueness Of Product And Technology 5 National Location Of Business 5 Degree Of Product-Market Understanding

2 ) Strategic-Competitive Factors: 5 Ease Of Market Entry 5 Ability To Create Post-Entry Barriers 5 Sustained Share Competitive Position 5 Nature And Degree Of Competition 5 Strength Of Suppliers And Distributors ) Management Team Factors: 5 Leadership Potential Of Management Team 5 Leadership Potential Of Lead Entrepreneur 5 Recognized Industry Expertise In Management Team 5 Track Record Of Lead Entrepreneur 5 Track Record Of Management Team ) Management Competence Factors: 5 Marketing/Sales Capabilities Of Team 5 Process/Production Capabilities Of Team 5 Organizational/Administrative Capabilities Of Team 5 Financial/Accounting Capabilities Of Team ) Financial Factors: 5 Time To Breakeven 5 Time To Payback 5 Expected Rate Of Return 5 Ability To Cash Out ) Fund Factors: 5 Business Meets Fund Constraints 5 Business And Product Fit With Fund Portfolio 5 Ability Of Investors To Influence The Deal 5 Location Of Business Relative To The Fund

3 ) Deal Factors: 5 Stage Of Investment Required 5 Number And Nature Of Co-Investors In Deal 5 Ability To Syndicate Deal 5 Scale And Chance Of Later Rounds Of Financing 5 Importance Of Unclear Assumptions Sample Region: Number Of Questionnaires: United Kingdom/Ireland 23 Germany/Austria/Switzerland 15 Italy 9 Nordic Countries 7 France 7 Belgium/Netherlands 7 Spain/Portugal 5 Total General Factor Findings ) Factors Applied By European Venture Capitalists Appear To Be Largely The Same As Those Reported In North America ) Findings Consistent With Previous Research On Top Factors: The Human Element Is Key ) There Appears To Be An Overall Sequence In Groupings Of Factors Applied: 5 Management Team 5 Management Competencies 5 Strategic-Competitive/Financial ) The Product-Market Characteristics Of Opportunities Appear To Be Of Only Moderate Importance

4 Relative Factor Count Vs. Rank Category Of Factors: Management Team Top 20% Second 20% Third 20% Fourth 20% Bottom 20% 5 Management Competencies Strategic- Competitive Financial 3 1 Product-Market Fund Deal 2 3 Ranked List Leadership Potential of Lead Entrepreneur Leadership Potential of Management Team Recognized Industry Expertise in Management Team Track Record of Lead Entrepreneur Track Record of Management Team Sustained Share Competitive Position Marketing/Sales Capabilities of Team Organizational/Admin Capabilities of Team Ability to Cash-Out Degree of Product-Market Understanding Expected Rate of Return Time to Break-Even Financial/Accounting Capabilities of Team Ability to Create Post-Entry Barriers Business Meets Funds Constraints Process/Production Capabilities of Team Uniqueness of Product & Technology Market Growth & Attractiveness Ranked List Degree Market Already Established Time to Payback Ability to Influence Nature of Business Importance of Unclear Assumptions Stage of Investment Required Ease of Market Entry Strength of Suppliers & Distributors Nature And Degree of Competition National Location of Business Business & Product Fit with Fund Portfolio Market Size Sensitivity to Economic Cycles Ability to Syndicate Deal Number & Nature of Co-Investors in Deal Seasonality of Product-Market Scale & Chance of Later Financing Rounds Location of Business Relative to Fund

5 Product-Market And Strategic-Competitive Factors Rank: Product-Market Factors: Strategic Competitive Factors: 11 Sustained-Share Competitive Position 14 Degree Of Product-Market Understanding 16 Ability To Create Post-Entry Barriers 18 Uniqueness Of Product & Technology Market Growth And Attractiveness Degree Market Already Established 21 Ease Of Market Entry Strength Of Suppliers And Distributors Nature And Degree Of Competition 22 National Location Of Business 23 Market Size 25 Sensitivity To Economic Cycles Findings From Cluster Analysis ) The Overall Level Of Association Among Venture Capitalists In Terms Of The Ranking Of The Investment Decision Criteria Appears Mixed ) Several Clusters Or Groupings Of Venture Capitalists Do Appear As Well As A Number Of Weakly Associated Individuals ) Groupings Do Not Appear To Be Associated By: 5 Country 5 Scale Of Fund 5 Typical Round Of Financing 5 Apparent Network Cluster Descriptions ) Opportunistic Investors ) Product-Market Investors ) People Investors ) Financial Investors

6 Cluster A: Opportunistic Investors 5 Ease of Market Entry (+6) 5 Scale And Chance Of Later Rounds Of Finance (+6) 5 Time To Breakeven (+5) 5 Ability To Cash Out (+4) 5 Degree of Product-Market Understanding (+4) 5 Sustained Share Competitive Position (-7) 5 Market Size (-7) 5 Stage of Investment Required (-6) 5 Degree Market Already Established (-5) 5 Ability To Create Post-Entry Barrier (-4) 5 Leadership Potential Of Management Team (-4) Cluster B: Product-Market Investors 5 Sensitivity To Economic Cycles (+10) 5 Market Growth And Attractiveness (+10) 5 Business Meets Fund Constraints (+6) 5 Sustained Share Competitive Position (+6) 5 Expected Rate of Return (+5) 5 Degree Market Already Established (-8) 5 Importance of Unclear Assumptions (-7) 5 National Location of Business (-7) 5 Time To Breakeven (-6) 5 Time To Payback (-5) 5 Process/Production Capabilities Of Team (-5) Cluster C: People Investors 5 Track Record Of Lead Entrepreneur (+8) 5 Market Size (+6) 5 Ability To Create Post-Entry Barriers (+5) 5 Leadership Potential Of Management Team (+5) 5 Degree Market Already Established (+4) 5 Expected Rate Of Return (-11) 5 Importance Of Unclear Assumptions (-10) 5 Business Meets Fund Constraints (-7) 5 Business And Product Fit With Fund Portfolio (-6) 5 National Location Of Business (-6)

7 Cluster D: Financial Investors 5 Expected Rate Of Return (+7) 5 Time To Breakeven (+5) 5 Ability Of Investors To Influence Deal (+5) 5 Business Meets Fund Constraints (+4) 5 Sustained Share Competitive Position (+4) 5 Recognized Industry Expertise In Team (+4) 5 Ability To Syndicate Deal (-7) 5 Importance Of Unclear Assumptions (-6) 5 Degree Of Product-Market Understanding (-6) 5 Strength Of Suppliers And Distributors (-6) 5 Market Size (-5) 5 Scale And Chance Of Later Round Financing (-5) Implications ) Venture Capital, Based On The Nature Of Investment Decision-Making, Appears To Be Pan-European ) Venture Capitalists Do Not Appear To Judge Investment Opportunities Primarily On Product-Market Or Strategic Competitive Factors ) On An Overall Basis, Venture Capitalists Look For A Top Notch Management Team ) They Do Not Appear To Be Overwhelmed By The Financials: Entrepreneurs Need To Spend Time And Effort In Positioning Team And Product-Market Opportunity Rather Than "Engineering" The Financials Implications ) Venture Capitalists Will Work Around Aspects Of The Deal And Fund Issues If The Opportunity Is Good Enough ) Venture Capitalists View Of Their World Is Colored By Their Prior Experience ) While These Observations Are Generally True, There Is A Great Deal Of Individual Variation In What Venture Capitalists See As Important: Entrepreneurs Need To Shop Their Deal ) Entrepreneurs: Look Beyond National Borders For Investment, Location Does Not Appear That Important