TRADE-OFFS IN THE INVESTMENT DECISIONS OF EUROPEAN VENTURE CAPITALISTS

Previous studies of venture capital investment criteria, which have te nded to utilize traditional Likert-sealed survey methods, have produce d some general findings which indicate that the ''human factor'' is of utmost importance. However, virtually all of these studies have been undertaken with U.S.-based venture capitalists. In addition, the studi es have generally been exploratory and have assumed a single hierarchy of decision criteria in all cases and across all venture capitalists. We do not accept that this is valid; therefore, our study tested this assumption by investigating the trade-offs made by venture capitalist s in Europe. Thirty-five investment criteria were identified from the literature and from experts in the field, and a questionnaire was deve loped that required the venture capitalist to make 53 pairwise trade-o ffs with multiple levels. Seventy-three venture capitalists from acros s Europe were interviewed and completed the questionnaire. Conjoint an alysis was used to compute relative rankings, and overall rankings wer e computed to provide some general insight into the overall importance of the various criteria. After this, cluster analysis was used to ide ntify different decision groupings. The trade-offs were randomized in the questionnaire but, for descriptive purposes, fall into the followi ng groupings: financial product-market, strategic-competitive, find, m anagement team, management competence, and deal. All five management t eam criteria (as opposed to management competence criteria) were ranke d among the first seven, product-market criteria appeared to be only m oderately important, and fund and deal criteria were at the bottom of the rankings. Overall, we conclude that the venture capitalists interv iewed would, as a group, prefer to select an opportunity that offers a good management team and reasonable financial and product-market char acteristics, even if the opportunity does not meet the overall find an d deal requirements. It appears, quite logically, that without the cor rect management team and a reasonable idea, good financials are genera lly meaningless because they will never be achieved. Cluster analysis identified three groupings of venture capitalists: those primarily con cerned with investing nationally, those who focus solely upon the deal , and those mainstream investors who consistently and instinctively ra nk the five management team criteria at the top of their list. However , there was no evident country bias-a conclusion that Is sustained if the countries are groped by physical proximity (northern versus southe rn Europe) or by size of the local venture capital community, a surrog ate for experience. Moreover, there was no relationship to the scale o f the fund, the typical round of financing, or the apparent network. T he article concludes by outlining the implications of the study for ve nture capitalists, entrepreneurs, and the research community.