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Venture capitalists' decision-making in small equity markets: a case study using participant observation

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  • Jorge Silva

Abstract

Despite significant academic research undertaken in the field of venture capital decision-making process, the dimension and maturity of equity market has not yet been considered as an important contextual factor. Aiming at developing an understanding on how venture capitalists (VCs) select early-stage projects in small equity markets, a pilot study using participant observation technique has been conducted in a Portuguese venture capital firm. The findings indicate that the decision-making process and the criteria used by VCs in this market context differ significantly from those used in the developed equity markets. Regarding the decision-making process as a whole, it appears to be more interactive than usually portrayed in previous models. Moreover, some of the activities take place simultaneously, rather than sequentially. In particular, relevant differences were found in deal origination, deal evaluation and closing phase. Regarding the decision-making criteria applied, the findings of this case study are in accordance to previous studies and suggest that the attention of VCs is very focused on entrepreneur(s). The business idea, its sustainable advantages and growth potential are also considered important but, contrarily to previous literature, financial projections do not seem to play a major role in the selection of early-stage projects.

Suggested Citation

  • Jorge Silva, 2004. "Venture capitalists' decision-making in small equity markets: a case study using participant observation," Venture Capital, Taylor & Francis Journals, vol. 6(2-3), pages 125-145, February.
    • Handle: RePEc:taf:veecee:v:6:y:2004:i:2-3:p:125-145
    DOI: 10.1080/13691060410001675974
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    Cited by:

    1. Rafał Morawczyński, 2020. "Venture Capitalists’ Investment Criteria in Poland: Entrepreneurial Opportunities, Entrepreneurs, and Founding Teams," Administrative Sciences, MDPI, vol. 10(4), pages 1-30, October.
    2. Nikolaus Franke & Marc Gruber & Dietmar Harhoff & Joachim Henkel, 2008. "Venture Capitalists’ Evaluations of Start–Up Teams: Trade–Offs, Knock–Out Criteria, and the Impact of VC Experience," Entrepreneurship Theory and Practice, , vol. 32(3), pages 459-483, May.
    3. Tarek Miloud & Arild Aspelund & Mathieu Cabrol, 2012. "Startup valuation by venture capitalists: an empirical study," Venture Capital, Taylor & Francis Journals, vol. 14(2-3), pages 151-174, February.
    4. Xinyi Liu & Artit Wangperawong, 2018. "A Collaborative Approach to Angel and Venture Capital Investment Recommendations," Papers 1807.09967, arXiv.org.
    5. Jungwirth, Carola & Barth, Loren, 2013. "The entanglement of intercultural conflicts and “bad” leadership in SMEs," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 67(4), pages 345-363.
    6. Tarek Miloud & Arild Aspelund & Mathieu Cabrol, 2012. "Startup valuation by venture capitalists: an empirical study," Post-Print hal-00951664, HAL.
    7. Kristin Hommel & Peter M. Bican, 2020. "Digital Entrepreneurship in Finance: Fintechs and Funding Decision Criteria," Sustainability, MDPI, vol. 12(19), pages 1-18, September.
    8. Glòria Estapé-Dubreuil & Arvind Ashta & Jean-Pierre Hédou, 2012. "Micro-prise de participation et entrepreneuriat social du point de vue du capital-risque :," Post-Print hal-00812966, HAL.
    9. Enrico Gonnella & Lucia Talarico, 2023. "The Reputation Factor in the Valuation of Startups," International Business Research, Canadian Center of Science and Education, vol. 16(7), pages 1-56, July.
    10. Jeaneth Johansson & Malin Malmström & Joakim Wincent, 2021. "Sustainable Investments in Responsible SMEs: That’s What’s Distinguish Government VCs from Private VCs," JRFM, MDPI, vol. 14(1), pages 1-22, January.
    11. Sonja Bettina Keppler & Marieta Olaru & Georgiana Marin, 2015. "Fostering Entrepreneurial Investment Decision in Medical Technology Ventures in a Changing Business Environment," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 17(38), pages 390-390, February.
    12. Alexandra Moritz & Walter Diegel & Joern Block & Christian Fisch, 2022. "VC investors’ venture screening: the role of the decision maker’s education and experience," Journal of Business Economics, Springer, vol. 92(1), pages 27-63, January.
    13. Caroline Tarillon & Han Yu & Ludivine Adla & Elodie Manthé & Geoffroy Enjolras, 2023. "Similarity is not everything: the influence of personal characteristics of entrepreneurs and investors on their fit," International Entrepreneurship and Management Journal, Springer, vol. 19(2), pages 709-732, June.
    14. Dohyeon Kim & Su Yong Lee, 2022. "When venture capitalists are attracted by the experienced," Journal of Innovation and Entrepreneurship, Springer, vol. 11(1), pages 1-18, December.
    15. Qing Lu & Peter Hwang, 2010. "The impact of liability of foreignness on international venture capital firms in Singapore," Asia Pacific Journal of Management, Springer, vol. 27(1), pages 81-97, March.
    16. Dmitry Khanin & Raj V. Mahto, 2013. "Do Venture Capitalists Have a Continuation Bias?," Journal of Entrepreneurship and Innovation in Emerging Economies, Entrepreneurship Development Institute of India, vol. 22(2), pages 203-222, September.
    17. repec:wsi:acsxxx:v:21:y:2019:i:08:n:s1363919619500105 is not listed on IDEAS
    18. Pavlova, Elitsa & Signore, Simone, 2019. "The European venture capital landscape: an EIF perspective. Volume V: The economic impact of VC investments supported by the EIF," EIF Working Paper Series 2019/55, European Investment Fund (EIF).
    19. Jeaneth Johansson & Malin Malmström & Joakim Wincent & Vinit Parida, 2021. "How individual cognitions overshadow regulations and group norms: a study of government venture capital decisions," Small Business Economics, Springer, vol. 56(2), pages 857-876, February.
    20. Petra Moog & Christian Soost, 2022. "Does team diversity really matter? The connection between networks, access to financial resources, and performance in the context of university spin-offs," Small Business Economics, Springer, vol. 58(1), pages 323-351, January.

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