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Toward a Model of Venture Capital Investment Decision Making

Author

Listed:
  • Vance H. Freid
  • Robert D Hisrich

Abstract

This paper uses a case study methodology to develop a model of the venture capital investment decision-making process. It identifies generic criteria that venture capitalists use. A six-stage process model is proposed: origination, venture capital firm-specific screen, generic screen, first-phase evaluation, second-phase evaluation, and closing. Different activities occur in each stage. It is argued that venture capitalist provides both supply-side and demand-side benefits to the market.

Suggested Citation

  • Vance H. Freid & Robert D Hisrich, 1994. "Toward a Model of Venture Capital Investment Decision Making," Financial Management, Financial Management Association, vol. 23(3), Fall.
  • Handle: RePEc:fma:fmanag:freid94
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    Cited by:

    1. Yung, Chris, 2019. "Entrepreneurial manipulation with staged financing," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 273-282.
    2. Petty, Jeffrey S. & Gruber, Marc, 2011. ""In pursuit of the real deal": A longitudinal study of VC decision making," Journal of Business Venturing, Elsevier, vol. 26(2), pages 172-188, March.
    3. Patzelt, Holger & zu Knyphausen-Aufseß, Dodo & Fischer, Heiko T., 2009. "Upper echelons and portfolio strategies of venture capital firms," Journal of Business Venturing, Elsevier, vol. 24(6), pages 558-572, November.
    4. Hsu, David H., 2007. "Experienced entrepreneurial founders, organizational capital, and venture capital funding," Research Policy, Elsevier, vol. 36(5), pages 722-741, June.
    5. Epure, Mircea & Guasch, Martí, 2020. "Debt signaling and outside investors in early stage firms," Journal of Business Venturing, Elsevier, vol. 35(2).
    6. Gorman, Gary G. & Rosa, Peter J. & Faseruk, Alex, 2005. "Institutional lending to knowledge-based businesses," Journal of Business Venturing, Elsevier, vol. 20(6), pages 793-819, November.
    7. Bruton, Garry D. & Ahlstrom, David, 2003. "An institutional view of China's venture capital industry: Explaining the differences between China and the West," Journal of Business Venturing, Elsevier, vol. 18(2), pages 233-259, March.
    8. Colombo, Massimo G. & D’Adda, Diego & Quas, Anita, 2019. "The geography of venture capital and entrepreneurial ventures’ demand for external equity," Research Policy, Elsevier, vol. 48(5), pages 1150-1170.
    9. Fried, Vance H. & Bruton, Garry D. & Hisrich, Robert D., 1998. "Strategy and the board of directors in venture capital-backed firms," Journal of Business Venturing, Elsevier, vol. 13(6), pages 493-503, November.
    10. Bengtsson, Ola & Hsu, David H., 2015. "Ethnic matching in the U.S. venture capital market," Journal of Business Venturing, Elsevier, vol. 30(2), pages 338-354.
    11. Wright, Mike & Robbie, Ken & Ennew, Christine, 1997. "Venture capitalists and serial entrepreneurs," Journal of Business Venturing, Elsevier, vol. 12(3), pages 227-249, May.
    12. Jones, Raymond J. & Barnir, Anat, 2019. "Properties of opportunity creation and discovery: Comparing variation in contexts of innovativeness," Technovation, Elsevier, vol. 79(C), pages 1-10.
    13. Dunne, Timothy C. & Clark, Brent B. & Berns, John P. & McDowell, William C., 2019. "The technology bias in entrepreneur-investor negotiations," Journal of Business Research, Elsevier, vol. 105(C), pages 258-269.
    14. Polzin, Friedemann & Sanders, Mark & Stavlöt, Ulrika, 2018. "Do investors and entrepreneurs match? – Evidence from The Netherlands and Sweden," Technological Forecasting and Social Change, Elsevier, vol. 127(C), pages 112-126.
    15. Lerner, Daniel A., 2016. "Behavioral disinhibition and nascent venturing: Relevance and initial effects on potential resource providers," Journal of Business Venturing, Elsevier, vol. 31(2), pages 234-252.
    16. Anjos, Fernando & Drexler, Alejandro, 2015. "Inter-company matching and the supply of informed capital," Journal of Economic Behavior & Organization, Elsevier, vol. 111(C), pages 119-136.
    17. Kollmann, Tobias & Kuckertz, Andreas, 2010. "Evaluation uncertainty of venture capitalists' investment criteria," Journal of Business Research, Elsevier, vol. 63(7), pages 741-747, July.
    18. Woike, Jan K. & Hoffrage, Ulrich & Petty, Jeffrey S., 2015. "Picking profitable investments: The success of equal weighting in simulated venture capitalist decision making," Journal of Business Research, Elsevier, vol. 68(8), pages 1705-1716.
    19. Ko, Eun-Jeong & McKelvie, Alexander, 2018. "Signaling for more money: The roles of founders' human capital and investor prominence in resource acquisition across different stages of firm development," Journal of Business Venturing, Elsevier, vol. 33(4), pages 438-454.
    20. Wiltbank, Robert & Read, Stuart & Dew, Nicholas & Sarasvathy, Saras D., 2009. "Prediction and control under uncertainty: Outcomes in angel investing," Journal of Business Venturing, Elsevier, vol. 24(2), pages 116-133, March.
    21. Amit, Raphael & Brander, James & Zott, Christoph, 1998. "Why do venture capital firms exist? theory and canadian evidence," Journal of Business Venturing, Elsevier, vol. 13(6), pages 441-466, November.
    22. Sardo, Filipe & Serrasqueiro, Zélia & Félix, Elisabete G.S., 2020. "Does Venture Capital affect capital structure rebalancing? The case of small knowledge-intensive service firms," Structural Change and Economic Dynamics, Elsevier, vol. 53(C), pages 170-179.
    23. Hansen, David J. & Deacon, Jonathan H. & Pascal, Vincent & Sethna, Zubin, 2020. "The future is in the past: A framework for the Marketing-Entrepreneurship Interface (MEI)," Journal of Business Research, Elsevier, vol. 113(C), pages 198-208.
    24. Townsend, David M. & Busenitz, Lowell W., 2015. "Turning water into wine? Exploring the role of dynamic capabilities in early-stage capitalization processes," Journal of Business Venturing, Elsevier, vol. 30(2), pages 292-306.

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