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THE SELECTION CRITERIA USED BY

VENTURE CAPITALISTS TO EVALUATE


NEW VENTURE INVESTMENT PROPOSALS.
A COMPARATIVE STUDY OF PUBLIC AND
PRIVATE PLAYERS IN BELGIUM.

Jury:

Dissertation by

Promoter:

Danile MLLENDER

Maurice OLIVIER

For a Masters Degree in Management

Reader(s):

Sciences

Georges HBNER

Academic year 2010/2011

Constanze CHWALLEK

Acknowledgements
I would like to acknowledge the following people for their encouragement, support and
assistance with this master thesis.
First of all, I would like to express my deepest gratitude to my promoter, Maurice Olivier,
who guided and supported me from the initial idea to the completion of this master thesis,
provided me with highly relevant information, documents and contact details and advised me
whenever I encountered impasse situations.
At HEC-ULg, I would like to thank Georges Hbner for his assistance and advice as well as
Bernard Caeymaex for the organization of this master thesis within the framework of the
double-degree master program with FH Aachen. I would also like to thank Constanze
Chwallek and Norbert Janz from FH Aachen for their encouragement and help.
This study has also greatly benefited from information, comments and suggestions by Yan
Alperovych, whose doctoral thesis was decisive for the choice of my research focus and who
advised me on the development of my questionnaire, Georges Nol, Benoit Leleux and HenriFranois Boedt.
I owe very special thanks to all participants in my empirical study who kindly received me for
interview. Their contribution enabled me to get valuable insight into real life practices of
venture capital decision making and to empirically verify my hypotheses and assumptions.
And last but not least, thanks are also due to my family and friends and all other people who
supported me, with special thanks going to Daniel Thies and Christopher Powell for proofreading this paper. Without their invaluable encouragement and help, the successful
completion of this work would not have been possible.

Executive Summary
Venture capital as a source of finance is of huge interest to entrepreneurs. Their own financial
means are usually limited in the early stages of development of their start-up business and
traditional providers of external capital (like banks) are prevented from intervening because
of uncertainties and information asymmetries. Now in order to convince venture capitalists
(VCs) to invest their time, money and effort in a venture, entrepreneurs need to know about
the selection criteria they use to evaluate new venture investment proposals.
The scientific research literature has given much consideration to these selection criteria in
the past, mainly with a focus on private VCs. Only few studies addressed the particular
selection criteria of public VCs which, rather than being financially motivated, are based on
economic and social objectives. Given the observed differences between various categories of
capital providers (e.g. banks, business angels and venture capitalists) in terms of selection
criteria, differences may also be expected within the category of venture capitalists. So it
suggests itself to investigate whether and what kind of differences in selection criteria exist
between public and private VCs in order to subsequently make useful recommendations to
entrepreneurs.
After a review of the existing scientific literature, an empirical study with 15 VCs in Belgium
has been carried out. Data about the VCs objectives, decision-making process and selection
criteria has been collected through personal interviews and a comparison between public and
private VCs has been made.
The results show no major differences between the different types of VCs in relative
importance attached to the criteria related to the entrepreneur and management team, the
product and the market. However, striking differences were found for VC- and fund-specific
criteria, the financial aspects of an investment project as well as economically and socially
motivated criteria.
The main recommendations to entrepreneurs are to get to know about the knock-out criteria
of the different VCs and to establish a first personal contact. Subsequently, it is important to
be well prepared and to make all aspects of the investment project as well as potential
problems and their solutions transparent.
7

Executive Summary (franais)


Le capital-risque comme source de financement a un intrt particulier pour les entrepreneurs.
Leurs moyens financiers propres sont souvent limits dans les premiers stades de
dveloppement de lentreprise entrepreneuriale et les incertitudes et asymtries dinformation
empchent les bailleurs de fonds traditionnels (tels que les banques) dintervenir. Alors, pour
convaincre les investisseurs de capital-risque dinvestir leur temps, argent et efforts dans un
projet entrepreneurial, les entrepreneurs doivent connaitre les critres de slection quils
utilisent pour valuer des nouveaux projets dinvestissement.
Ces critres de slection ont souvent t traits dans la littrature scientifique dans le pass,
pour la plupart en mettant laccent sur les investisseurs de capital-risque privs. Peu dtudes
se sont jusqu prsent penches sur les critres de slection spcifiques aux investisseurs de
capital-risque publics. Ceux-ci, plutt que dtre motivs par des rendements financiers, sont
bass sur des objectifs conomiques et sociaux. Etant donn les disparits constates entre les
critres de slection de diffrentes catgories dinvestisseurs (p. ex. banques, business angels,
investisseurs de capital-risque), des diffrences peuvent galement tre attendues lintrieur
de la catgorie des investisseurs de capital-risque.
Aprs avoir revu la littrature scientifique existante, une tude empirique sur 15 investisseurs
de capital-risque en Belgique a t mene. Par voie dentretiens personnels, des informations
sur les objectifs, le processus de prise de dcision et les critres de slection ont t collectes
et une comparaison entre investisseurs de capital-risque publics et privs a t ralise.
Les rsultats obtenus nont pas montr de diffrences majeures au niveau de limportance que
les diffrents types dinvestisseurs de capital-risque attachent aux critres lis lentrepreneur
et lquipe managriale, au produit et au march. Toutefois, des diffrences remarquables
ont t observes pour les critres relatifs aux investisseurs et leurs fonds, les aspects
financiers ainsi que les critres bass sur des objectifs conomiques et sociaux.
Il est ds lors recommand aux entrepreneurs de sinformer sur les critres dexclusion des
diffrents investisseurs de capital-risque et dtablir un premier contact personnel. Ensuite, il
est important dtre bien prpar et de rendre transparent tout aspect du projet
dinvestissement ainsi que les problmes potentiels et leurs solutions possibles.
9

10

Foreword
Majoring in marketing, I should ideally discuss and analyze a subject in the field of marketing
for this research project. As university papers and marketing studies often treat typical topics
such as the influence of factor X on the purchasing behavior of customers or recent trends
like online sales and social media, I was keen on looking at marketing from another point of
view.
Nowadays, it is generally known that potential customers should be thought of very early in
the development process of a firm and its product or service. However, without appropriate
funding, a company will not even reach the stage of development at which it can market and
sell its product or service. Before any sort of marketing toward customers makes sense,
entrepreneurs have to do marketing toward investors. While potential customers are
seduced to purchase a product or service based on the AIDA model (i.e. create Awareness,
Interest, Desire and finally incite Action), potential investors have to be convinced in a
similar way to invest in a project long before that. Entrepreneurs have to create awareness
(proposal/deal origination), interest and desire (during the screening and evaluation process)
on the part of investors and finally convince them to invest their money, time and effort into a
project.
The purpose of this paper is to investigate the aspect of investment criteria used by one
particular type of investor that an entrepreneur may direct his/her convincing process to,
namely venture capitalists (VCs). During the screening and evaluation stage of their
investment process, VCs rely on a certain number of criteria in order to decide whether or not
to invest in a new venture investment proposal. Knowing about these criteria, of course, is
crucial for an entrepreneur or a management team that seeks funding. From the 1970s
onwards, this subject has been thoroughly studied and analyzed, using different data sets,
methodologies and analysis tools, but always with a focus on independent VCs. Public VC
agencies on the contrary have been looked at in order to study their raison dtre, their
objectives and their overall efficiency and performance.
After reviewing some of the related scientific literature and especially after having attended
two key events namely the defense of the doctoral thesis of Yan Alperovych in Lige and
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the euBAN matching forum in Aachen in April 2011 , a subject which has not received
much attention in the research literature yet could be detected. The focus of this paper will
therefore be on the differences in investment criteria between public and private VCs and the
related empirical study will treat the case of Belgium more specifically.

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CONTENTS
Acknowledgements ................................................................................................................... 5
Executive Summary ................................................................................................................. 7
Executive Summary (franais) ................................................................................................ 9
Foreword ................................................................................................................................. 11
List of Figures ......................................................................................................................... 15
List of Tables........................................................................................................................... 17
Abbreviations .......................................................................................................................... 19
1

Introduction .................................................................................................................... 21

Literature Review ........................................................................................................... 31


2.1

Selection criteria of private VCs ............................................................................ 31

2.1.1

An overview of previous studies ...................................................................... 31

2.1.2

Espoused vs. in use selection criteria .............................................................. 35

2.1.3

Selection criteria vs. success factors ............................................................... 36

2.1.4

Evaluation uncertainty and overconfidence .................................................. 39

2.2

Specific objectives and selection criteria of public VCs ....................................... 41

2.3

Trade-offs between various selection criteria ....................................................... 43

2.4

Factors influencing the selection criteria and their relative importance ........... 45

2.4.1

The subdivision of the screening and evaluation phase ................................ 45

2.4.2

First round vs. subsequent follow-up investments ........................................ 47

2.4.3

Open-end vs. closed-end funds and related constraints................................ 47

2.4.4

The source of referral ...................................................................................... 48

2.4.5

Syndication and investment consortia ............................................................ 49

2.4.6

Prior investment by BAs or VCs and government subsidies ....................... 50

2.4.7

The compensation of fund managers .............................................................. 50

2.5

The impact of the recent financial and economic crisis ....................................... 51

2.6

Public vs. private VCs: A synthesis ........................................................................ 55

Venture capital in Belgium ............................................................................................ 59

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Methodology ................................................................................................................... 65
4.1

Sample construction ................................................................................................ 65

4.2

Data collection .......................................................................................................... 66

4.3

Method of data analysis .......................................................................................... 68

Results and discussion.................................................................................................... 71


5.1

Selection criteria ...................................................................................................... 71

5.2

Trade-offs ................................................................................................................. 77

5.3

Influencing factors ................................................................................................... 80

5.4

The impact of the crisis ........................................................................................... 85

Conclusion ....................................................................................................................... 89

Limitations and suggestions for further research ....................................................... 93

References ............................................................................................................................... 99
Appendix ............................................................................................................................... 107
I

Semi-structured questionnaire ................................................................................. 107

II Relative importance of selection criteria median ................................................ 112

14

List of Figures

Figure 1: Search, experience and credence qualities and the venture capital process ............. 39
Figure 2: European private equity activity quarterly evolution ............................................ 53
Figure 3: Fundraising in Europe quarterly evolution ............................................................ 54
Figure 4: Investments in Europe quarterly evolution ............................................................ 54
Figure 5: Synthesis of relevant selection criteria ..................................................................... 55
Figure 6: Relative importance of selection criteria arithmetic mean .................................... 72
Figure 7: Relative importance of selection criteria median ................................................ 112

15

16

List of Tables

Table 1: Sample segmentation type of VC / type of fund matrix ......................................... 81


Table 2: Sample segmentation type of VC / type of management compensation matrix ..... 85

17

18

Abbreviations

BA Business Angel
BVA Belgian Venture Capital & Private Equity Association
EU European Union
EVCA European Private Equity & Venture Capital Association
GIMV Gewestelijke InvesteringsMaatschappij Vlaanderen
GP General Partner
IPO Initial Public Offering
IRR Internal Rate of Return
LP Limited Partner
LRM Limburgse ReconversieMaatschappij
M&A Merger & Acquisition
PMV ParticipatieMaatschappij Vlaanderen
R&D Research & Development
SBIR Small Business Innovation Research
SME Small and Medium-sized Enterprises
SoGePa Socit wallonne de Gestion et de Participations des entreprises
SOWALFIN SOcit WALlonne de FINancement et de garantie des petites et moyennes
entreprises
SRIB Socit Rgionale dInvestissement de Bruxelles
SRIW Socit Rgionale dInvestissement de Wallonie
US United States
VC Venture Capitalist or Venture Capital (depending on the context)

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1 Introduction
Before defining the research objectives of this paper, a brief review of some of the basics of
venture capital financing will put this study into context.
The main reason for venture capitalists (VCs) to exist is the difficulty of young
entrepreneurial firms to meet their financing needs through traditional mechanisms
(Gompers & Lerner, 2004, p. 157). Gompers and Lerner (2004) argue that entrepreneurs face
a number of difficulties which prevent traditional providers of external capital (like banks)
from intervening at least at a reasonable cost of capital. Among these difficulties,
uncertainty concerning the future development of the project or firm and information
asymmetry between the provider of capital and the entrepreneur can be named. Bazkaya and
Van Pottelsberghe de la Potterie (2008) add high risk, weak track record of the entrepreneurs,
a lack of tangible assets, long term growth potential rather than short term revenues and
turbulent, high-risk environments as other potential difficulties for young firms.
For this reason in the very early stage most entrepreneurs can only rely on funding from
the well-known FFFF, i.e. the founders, their families and friends or fools who are willing to
invest their money. However this capital is often not sufficient to cover the high initial
investment many entrepreneurs face.
This is where VCs or public, government-sponsored initiatives come into play. Olivier (2010)
provides an overview of the types of investor that intervene at different development stages of
a firm. He shows that during the earlier investment stages, mainly regional or university funds
as well as another type of investors not considered in this paper, namely business angels
(BAs), networks of BAs or BA funds provide funding. Many venture capitalists (public as
well as private) only invest at later stages, i.e. they provide expansion, replacement and
buyout capital (Leleux & Surlement, 2003, p. 87). Nevertheless, there are VCs that,
exclusively or in addition to investing in later-stage projects, provide money to early-stage
(seed and start-up) and early-growth firms.
By thoroughly screening and evaluating every project before an investment is made
(commonly referred to as due diligence), VCs can reduce uncertainty and perceived risk
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inherent in a company or project something that banks usually cannot do due to time
constraints and their limited knowledge of the entrepreneurs business and industry. When
setting up the term sheet, and later on the shareholders agreement, VCs know exactly what to
focus on in order to prevent potential future problems. Later on, with an active member on the
investees board, the venture capital company has access to a large amount of internal data
and information and maintains a close contact with the entrepreneurs something which
banks are never able to do to the same extent.
For VCs, the cost of information gathering is lower than for private or institutional investors
investing directly into start-up companies due to economies of scale (they represent a number
of investors), economies of scope (they invest in a number of start-ups) (Sahlmann (1990) as
cited in Fried & Hisrich (1994)) and a learning curve (Hall & Hofer, 1993). Amit, Brander
and Zott (1998) add that VCs due to their information-processing capacities have the
ability to reduce information asymmetries and hence to prevent from adverse selection and
moral hazard problems, two different types of information asymmetries. The first
phenomenon, which occurs from hidden information (Amit et al., 1998, p. 443), refers to
one party in a transaction having information that is not available to the other party. The
second phenomenon, also called hidden action, is observed when one party in a transaction
cannot (or can hardly) verify the true intentions and related actions of the other party, until it
might already be too late. This e.g. is the case for an investor who does not know for sure that
the entrepreneur he gave his money to will not simply take the money and run (Amit et al.,
1998, p. 443). The party who enjoys an informational advantage in the previous example
this would be the entrepreneur can then abuse this information asymmetry at the cost of the
other party.
All these advantages compared to traditional providers of external capital make venture
capitalists (among others) the right investors for intervening at an early stage of development
of an entrepreneurial business. As the Belgian Venture Capital & Private Equity Association
puts in on their website, venture capital investors not only provide equity capital, but
experience, contacts and advice when required, which sets venture capital apart from other
sources of business capital (Belgian Venture Capital & Private Equity Association [BVA],
n.d.).

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Among the above-mentioned VCs, we can find both private and public as well as captive and
semi-captive venture capital firms. Van Osnabrugge and Robinson (2001) and Leleux and
Surlement (2003) give some explanation as to what the differences between these types of
VCs are, which is complemented by the statements of various other authors in the following.
Private VCs, also referred to as independent VCs, raise money in the competitive outside
environment from pension funds, corporations and individuals (Van Osnabrugge &
Robinson, 2001, p. 27). Achleitner (n.d.b), in the online version of the Gabler
Wirtschaftslexikon, explains that independent funds are not dependent on one single capital
provider but may act independently due to various investors holding shares in the fund. They
usually work with closed funds of predefined size and with known liquidation horizon, under
the legal framework of limited partnerships (Meyer & Mathonet, 2005). Typical fund terms
vary between 7 and 10 years, with extensions usually being possible (Meyer & Mathonet,
2005). Money will then be invested from those funds as interesting investment proposals are
identified, with investments in new projects usually occurring during the first 3 to 5 years of
the funds lifetime, i.e. during the investment period (interview partner, personal
communication, June 30, 2011). In the subsequent 5 to 7 years, only follow-up investments
will be made in already existing portfolio companies and finally, the exits will be prepared
(H.-F. Boedt, personal communication, June 22, 2011; interview partner, personal
communication, June 27, 2011). As soon as a successful exit is done, the return goes back to
the investors who then have the opportunity to put the money back into the fund or not,
depending on what the limited partnership agreement of the VC fund foresees concerning this
issue (Meyer & Mathonet, 2005; interview partner, personal communication, June 23, 2011).
Public VCs are born when government initiatives consist in direct government support.
Because one of the ways governments can support entrepreneurs is by providing direct
financial support to start-up firms (Oehler, Pukthuanthong, Rummer & Walker, 2007, p. 10).
In addition to or partly instead of the objectives private and captive VCs have which mainly
consist in yielding returns for investors or parent companies government-sponsored and
-managed VCs look at other effects of their investment. Among those, most notably,
innovation, economic growth, job creation or maintenance and the development of a specific
region or the whole country can be named. Attention needs to be paid when defining the term
public VCs as confusion might arise between publicly sponsored and publicly managed VC
funds. A publicly sponsored fund is a fund where all or a major part of the shareholders are
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local, regional or federal government entities but the fund as such can be a private corporation
managed by non-state employees. A publicly managed fund however is entirely or partly
sponsored by local, regional or federal government entities and in addition managed by civil
servants or government employees (Leleux & Surlemont, 2003, p. 82). Among industry
professionals, the term public VC is usually used for a fund that is entirely or partly
sponsored by government entities and in addition managed by civil servants or state
employees. The decisive characteristic for the classification as public VC is thus usually the
organization and management structure of the VC funds and less the source of capital. A fund
consisting of a majority of public capital which is managed independently, like a private
company, would consequently rather be considered as a private VC.
Although captive and semi-captive VCs are not in the focus of this paper, they will be briefly
described in order to present a complete picture of the different types of VCs that exist.
Captives are VCs which depend on a parent company such as a bank or an insurance
company and obtain the money they invest from this parent institution. Their funds often are
open-end as the parent company allocates money to the fund whenever it is considered
appropriate and evergreen as the returns made on exited portfolio companies re-enter the
fund, i.e. are recycled, and used for future investment in new projects (M. Olivier, personal
communication, June 17, 2011). Achleitner (n.d.a) differentiates between two notions of the
term captive fund. In a broader sense, it refers to a fund with one single capital provider
(i.e. one single source of funding) and may describe a corporate fund where the investor is an
industrial company. In the more narrow sense of the term however, it is used when the source
of funding is a financial institution such as a bank or an insurance company. A semi-captive
venture capital fund can be described as an intermediate type of fund between a captive and a
private fund (Achleitner, n.d.c). However, one may also find funds where capital is provided
together by corporate and public sources. Such funds can also be considered as semi-captive
in some way even though they are an intermediate type of fund between a captive and a
public fund (interview partner, personal communication, July 1, 2011).
A type of risk capital investor that does not perfectly fit into one of the above-mentioned
categories is the university-related VC or university fund. If the best-fitting category had to be
chosen, then university funds probably would be considered as public rather than private.
Nevertheless, they present several particularities. University funds closely collaborate with
one or several universities and their technology transfer units in order to finance university
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research projects and spin-offs or university-related projects. Concerning the source of


capital, university funds are most of the time at least partially financed with public money
from local or regional government entities. The rest of the capital is then invested by banks,
insurance companies, institutional investors, industrial companies or private individuals into
the fund. Compared to public VCs, they sometimes work with closed-end funds. The focus
concerning investment stage, round and size is usually narrow for university-related VCs as
they intervene at the earliest stage, i.e. at seed or even pre-seed stage (to bridge the gap
toward[s] private early stage financing (European Commission, Directorate-General for
Enterprise and Industry, 2009)).
As potential investors in start-up companies, the above-mentioned types of VC funds are of
fundamental importance in the considerations of entrepreneurs who seek financing. Now for
entrepreneurs to get access to this enormously important source of funding during an early
stage of their business, they have to know the investment criteria sought by VCs during the
screening and evaluation phase of their investment process (Hall & Hofer, 1993). Chen, Yao
and Kotha (2009) say that entrepreneurs have to sell their venture plans to potential
investors (p. 199) and that they have to convince them to invest their money, time and
effort (p. 199). Knowing how to do that and what really matters to VC investors may help
entrepreneurs increase the likelihood of their obtaining funding (Chen et al., 2009, p. 199) as
they will be better prepared when meeting the investors.
Scientific literature has given much consideration to venture capitalists decision making and
investment criteria from the 1970s onwards. Various authors in the field investigated which
investment decision-making criteria venture capitalists use to evaluate investment proposals
that are presented to them and which of these criteria they consider most important. These
studies mainly looked at private VCs and many of the early studies come from the United
States which can be considered as the cradle of venture capital. Among them, Wells (1974)
(as cited in Tyebjee & Bruno, 1984), Tyebjee and Bruno (1984) and MacMillan, Siegel and
Subba Narasimha (1985) can be named. Later on, research on VC investment criteria has
been done in Europe too (e.g. Muzyka, Birley & Leleux, 1996; Colin & Stark, 2004).
Concerning public VCs however, research literature mainly focused on their raison dtre,
their objectives and their overall efficiency and performance (e.g. Lerner, 1999; Leleux &
Surlemont, 2003; Lerner, 2004; Alperovych, 2011). Their specific investment criteria and
related selection of investment projects have not received much attention yet, and even less so
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in direct comparison with the investment criteria used by private VCs. This consequently is
the purpose of the present paper, which is organized as follows.
In the next two subsections, the research objectives will be stated and the research questions
will be defined. Section 2 will make a review of the existing literature on the various areas of
interest in the field of VC investment criteria. Section 3 gives an overview of the Belgian VC
industry which is in the focus of the empirical study done in the context of this research
project. Section 4 is dedicated to the design and execution of this study. Section 5 will present
and discuss the results. Finally, section 6 concludes the paper and section 7 addresses
potential limitations and suggestions for future research .

1.1

Research objectives

First of all, this paper is an attempt to complete the research literature and the general
knowledge on VC investment criteria by studying the criteria used by public and private VCs
to evaluate new venture investment proposals in direct comparison. Although probably using
similar selection criteria for the evaluation of investment proposals, it is expected that, due to
differences in investment objectives and various factors surrounding the investment decision,
public and private VCs weight those selection criteria differently.
Secondly, these potential differences have, among others, implications for entrepreneurs. A
very practical motivation behind this study consequently is the aim of giving advice to
entrepreneurs who approach different types of risk capital providers in order to obtain
funding. Entrepreneurs need to be aware that different types of capital providers look at
business plans from different perspectives (Mason and Stark, 2004, p. 227) and evaluate
investment projects in different ways and based on different criteria. These differences have
been studied and highlighted by Mason and Stark (2004) for banks, business angels and
venture capitalists in order to give entrepreneurs the opportunity to maximize the likelihood
of their obtaining finance. If these three categories differ in terms of investment decisionmaking criteria because they have different expectations and want to achieve different
objectives, one might also expect differences in decision-making criteria between public and
private VCs as they may pursue different objectives. No research has yet been done on such
potential differences within the category of venture capitalists. The second objective of this
paper is thus to advise entrepreneurs on under which circumstances and how to approach each
26

category of VCs and upon which elements (related to potential selection criteria) to place the
emphasis when presenting an investment proposal.
In order to find out about the above-mentioned potential differences and to give valuable
advice to entrepreneurs, the following research questions will be addressed.

1.2

Research question & sub-questions

The main research question addressed in this paper is as stated in the following paragraph.
How do the selection criteria that public venture capitalists use during the
screening and evaluation phase of their investment process to evaluate new
venture investment proposals differ from those used by private venture
capitalists?
Based on this research question, several sub-questions have been determined that will address
different aspects of the broader research question.
Sub-question 1: Which selection criteria do private venture capitalists use during
the screening and evaluation phase of their investment process?
Sub-question 2: Which specific objectives do public venture capitalists have and
how does this influence the selection criteria they use during the screening and
evaluation phase of their investment process?
Sub-question 3: What kind of trade-offs do venture capitalists make between
various selection criteria?
Sub-question 4: Which factors do have an influence on selection criteria and their
relative importance?
Sub-question 5: To what extent did the recent financial and economic crisis have
an impact on the activity of venture capitalists and their selection criteria?
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In order to clearly identify and narrow down the objectives and the focus of this paper,
various terms and concepts used in the research question and in the sub-questions should be
defined.
While some authors of prior scientific literature about venture capitalist investment criteria
investigated individual-level decision making, others concentrated on group-level decision
making within the VC team or organization. For the purpose of this study, no focus will be
placed on either type of decision making. We rather analyze general decision-making
practices and related investment criteria as used by the investment managers and the
investment committee of VC firms and funds. The term venture capitalists should thus be
taken in the broadest sense of the word, including individual VCs, teams of VC investment
managers and the VC investment committee.
A general differentiation between private, public, captive and semi-captive VCs as well as
university-related VCs has already been made earlier in this introductory part. In the context
of this study, as highlighted by the research question and the associated sub-questions, the
main focus is on private and public VCs (and university funds, which are treated separately
for the empirical part of this study, although their investment objectives and behavior may
rather be considered as public than as private). Given that the boundaries between the
different types of VCs are not always clear, the various elements differentiating private,
public and university funds will be considered in order to place each of them into the category
that best represents its characteristics. Concerning the difference between private and public
VCs, the organization and type of management of a given VC usually matters most in order
to place it into either category.
The focus of this study is on investment proposals submitted by new ventures, i.e. ventures
looking for early-stage (i.e. seed and start-up) and early-growth capital (Zacharakis &
Shepherd, 2005). Olivier (2010) explains the various stages as follows. While financing of the
seed stage of a company refers to a relatively small amount of capital provided to an
entrepreneur to prove a concept, start-up financing comprises financing provided to
companies for use in product development and initial marketing and financing provided to
launch the first product / service into market, build distribution channels and start selling.
Early-growth financing is used for working capital [provided to a company] to stabilize and

28

develop market potential. The company could be producing and shipping but may not be
showing profit [yet].

29

30

2 Literature Review
2.1

Selection criteria of private VCs


2.1.1

An overview of previous studies

Private VC funds are most often organized as limited partnerships, with the investors who
provide their capital to the fund being called limited partners (LPs) and the fund managers
being referred to as general partners (GPs) (Meyer & Mathonet, 2005). A number of
agreements between LPs and GPs define the terms and conditions of the fund, including
among others investment objectives, fund term and fund size (for detailed information see
Meyer & Mathonet, 2005). The most prevalent objective for private VCs and their fund
managers (GPs) seems to be investor return, which is closely related to the fund managers
own return. In addition to management fees, which are considered as a base compensation,
the carried interest represents the biggest part of the fund managers compensation and
provides a variable, performance-based incentive (Meyer & Mathonet, 2005). A hurdle rate
makes sure that general partners are only compensated for over-performance (Maxwell,
2003a as cited in Meyer & Mathonet, 2005, p. 33).
In an attempt to achieve extraordinary returns for LPs and GPs, VCs want to make sure they
only have the best companies in their portfolio. The identification of superior concepts, i.e.
the selection of high-potential investment projects, and later on the active involvement in and
monitoring of the funded portfolio companies contribute to attaining these return objectives
(Alperovych, 2011). This paper focuses on the initial selection of investment proposals and
on the investment criteria used in this context.
The selection criteria VCs use to evaluate investment proposals (often referred to as
investment criteria in research literature) have been thoroughly studied, in many different
ways, with various samples, survey methods and analysis techniques, since the mid-seventies.
Among others, the following studies and research papers contributed to shed light on how
venture capitalists make their investment decisions: Wells (1974) (as cited in Tyebjee &
Bruno, 1984); Poindexter (1976) (as cited in Tyebjee & Bruno, 1984); Tyebjee and Bruno
(1984); MacMillan et al. (1985); Hall and Hofer (1993); Muzyka et al. (1996); Zacharakis
31

and Meyer (1998); Shepherd (1999); Mainprize, Hindle, Smith and Mitchell (2002);
Riquelme and Watson (2002); Mason and Stark (2004); Lerner (2004); Zacharakis and
Shepherd (2005); Khanin, Baum, Mahto and Heller (2008); Chen et al. (2009); Kollmann and
Kuckertz (2010).
In the 1970s, a study of eight VC firms by Wells (1974) (as cited in Tyebjee & Bruno, 1984)
found that, by order of relative importance, management commitment, the product, the
market, marketing skills, engineering skills, the marketing plan, financial skills,
manufacturing skills, the entrepreneurs references, other VC participants in the deal, industry
and technology as well as the cash-out (exit) method are important for a VCs investment
decision.
Two years later, Poindexter (1976) (as cited in Tyebjee & Bruno, 1984) studied a sample of
97 VC firms and found out that, among others, quality of management, expected rate of
return, expected risk, management stake in firm, venture development stage, investor control
and tax shelter considerations play a role as investment criteria.
Tyebjee and Bruno (1984) looked at the importance of various venture characteristics
grouped into five categories, namely market attractiveness (size, growth, access to
customers), product differentiation (uniqueness, patents, technical edge, profit margin),
managerial capabilities (skills in marketing, management and finance as well as the
references of the entrepreneur(s)), environmental threat resistance (technology life cycle,
barriers to competitive entry, insensitivity to business cycles and downside risk protection)
and cash-out potential (opportunities for a successful exit with capital gains through M&A or
IPO). They suggest that investment decisions are, after all, based on expected return and
perceived risk. Their analysis shows that expected return is determined by market
attractiveness and product differentiation and perceived risk is determined by managerial
capabilities and environmental threat resistance.
One of the best known and most cited research papers on VC investment criteria is the one by
MacMillan et al. (1985). They use a well-fitting metaphor in order to describe their findings.
No matter how convincing the horse (product), the horse race (market) or the odds (financial
criteria) seem, it is the jockey (entrepreneur) who fundamentally determines whether the
venture capitalist will place a bet at all (p. 119). They further explain that a business plan,
32

which is the complete and detailed explanation of the business concept (product/technology,
business model, market potential and competitive environment), is necessary but never
sufficient. It is only a first proof of the jockeys ability to ride. MacMillan et al. (1985) used
five categories of criteria in their study, with a total of 24 criteria being evaluated. In order of
decreasing relative importance within their category, the most important criteria were: the
entrepreneurs personality (capable of sustained intense effort, able to evaluate and react well
to risk, articulate in discussing venture, attends to detail); the entrepreneurs experience
(thoroughly familiar with the target market, demonstrated leadership ability in the past, track
record relevant to the venture); characteristics of the product or service (proprietary or
protectable product); characteristics of the market (target market enjoys significant growth
rate); financial considerations (return equals at least 10 times my investment within 5-10
years, investment can easily be made liquid through IPO or sale). Among the ten criteria most
often rated as essential (meaning that without these criteria being met, the investment will be
rejected), five were related to the entrepreneur, showing to what extent he or she is relevant to
the investment decision. They also stress the importance of a balanced management team,
without which nearly half of their sample would not invest no matter how glamorous the
other aspects of the proposal are. Whether a complete balanced team is a condition for
receiving VC finance however remains controversial. About twenty years later, Lerner (2004)
points out that a lot of VCs put their own hand-picked manager (p. 17) showing a track
record of successfully managed similar start-ups at the head of the entrepreneurial firm,
which means that a complete team does not seem to be absolutely necessary.
Perceived risk inherent in the investment project and the ability to manage it also play an
important role. MacMillan et al. (1985) differentiate between competitive risk, bail-out risk
(risk of not exiting the investment when wished), investment risk (risk of total loss),
management risk (risk of mismanagement of the venture), implementation risk (risk related to
product and marketing development failures) and leadership risk (risk related to an
entrepreneur unable to lead others). All these risks, according to them, can be managed by
making sure that certain investment criteria are met.
MacMillan, Zeman and Subba Narasimha (1987) include the chemistry or fit between the VC
and the entrepreneur(s) as well as the VCs intuition and gut feeling into the range of
important investment criteria.

33

Hall and Hofer (1993) could not find evidence for the importance of the entrepreneurial team
or the business strategy of the venture. This is highly surprising given the results of other
prior and later studies.
Lerner (2004) enumerates criteria similar to those found by prior authors (promising
technology, flexible and experienced management team, market size, fulfillment of market
needs) and adds that, if available, the feedback from existing or potential customers is an
important element to consider.
Based on an attempt to highlight differences in business plan evaluation between bankers,
VCs and BAs, Mason and Stark (2004) provide a list of criteria that has been established from
the thought segments of their verbal protocols. The criteria most often mentioned by VCs in
decreasing order of frequency counts were market (potential and growth, demonstrated
market need, level and nature of competition, barriers to entry), financial considerations (cost
and pricing, projections of revenue stream, value of the equity, likely rate of return and exit
route possibilities), entrepreneur/management team (background, experience, track record,
commitment and enthusiasm, range of skills), strategy (overall business concept),
product/service (nature of the product/service, uniqueness, distinctiveness, innovativeness,
quality, performance, appearance and aesthetic appeal, function, flexibility) and the business
plan (the whole package).
If the venture capital decision-making process is considered as a persuasion process, as in the
study led by Chen et al. (2009), two major entrepreneur-related decision criteria are taken into
account: passion for their project and preparedness with regard to their business plan. This
study adds a more psychological dimension to the criteria mentioned so far and Chen et al.
(2009) suggest that perceived preparedness might be the missing link between a set of
objective criteria [that] VCs may or may not use in their investment decisions (p. 212).
Manigart, Wright, Robbie, Desbires & De Waele (1998), who rather focused on the financial
valuation aspect, studied the valuation process of VCs for the appraisal of new investment
projects. They say that VCs first invest in intensive information gathering by consulting
various sources, then assess the investment risk and the required rate of return and finally
value the investment proposal with different methods. Based on their empirical study, which
among others looked at Belgium (in combination with the Netherlands), they were able to
34

determine factors that influence risk inherent in a project and the resulting required return.
The main risk indicators identified for the Belgian subsample were related to the quality
(skills) of the management team and the characteristics of the product and market of the firm.
The main factors influencing the required rate of return were degree of innovation, length of
investment, general economic conditions and sector and whether the exit is planned in
advance or not.
The required rate of return (or the multiple that investors expect to receive on their
investment) as a selection criteria highly depends on the degree of risk involved in an
investment project (H.-F. Boedt, personal communication, June 22, 2011). Very early-stage
(seed or start-up) projects thus require high(er) expected returns as they in general involve a
high degree of risk.
An addition that Petty (2009) makes to what previous researchers found about the screening
and evaluation phase of the venture capital decision-making process consists in highlighting
its dynamic nature with selection criteria being continually updated by the VC firm over time.
This happens based on VC firm-internal events and circumstances as well as changes in the
investment environment.
2.1.2

Espoused vs. in use selection criteria

A study by Zacharakis and Meyer (1998) analyzes the apparent lack of insight that experts
such as VCs have into their own decision making. By comparing the investment criteria
enumerated by VCs when directly asked and the investment criteria they really rely on (actual
in use criteria), it becomes apparent that information overload (business plan, own due
diligence, external information, etc.) causes noise and hinders VCs to truly understand how
they finally make investment decisions (Zacharakis & Meyer, 1998). Although some of the
criteria enumerated in VC investment criteria research are definitely used for decision
making, the relative importance that these prior, self-report studies found might not be
correct. As the results of Kollmann and Kuckertz (2010) suggest, VCs tend to over-stress
criteria irrelevant to day-to-day business, while under-stressing significant criteria concerning
the profitability and survivability of a given venture (p. 746).

35

Shepherd (1999) tested eight investment criteria for their relative importance and when
asked directly (espoused criteria) VCs considered all of them as being equally important.
However, when looking at the criteria actually in use that have been gathered with a real
time data collection method during the decision-making process, especially industry-related
experience outweighed the other criteria and seems to be the most important factor in use.
2.1.3

Selection criteria vs. success factors

According to Riquelme and Watson (2002), VCs have implicit theories about what makes a
venture successful and based on these beliefs, they define decision or selection criteria in
order to evaluate a ventures potential to be successful in the future. Whether the venture
characteristics (upon which these selection criteria are based) will actually lead to success is
not always proven. Riquelme and Watson (2002) further explain that many researchers who
focused on selection criteria in VC decision making in the past simply assumed that the
criteria they determined were valid and thus associated with success. One reason for this
approach is the difficulty to establish a relationship between decision criteria and actual future
success of a venture. However, they say it is crucial to know whether the identified criteria
actually work and lead to future business success. Otherwise, VC decisions based on those
criteria can become a real disaster instead of a success.
Zacharakis and Shepherd (2001) discuss the availability bias which suggests that VCs often
make a decision about a current venture on the basis of how it matches past successful or
failed funded ventures (p. 325). Zacharakis and Meyer (1998) had suggested that VCs
should use checklists with key criteria when evaluating venture proposals. These could then
be updated over time as certain funded ventures succeed and others fail (p. 74). Whether
this is a viable way of doing remains questionable due to potential differences in venture
characteristics and changes in the investment environment which are likely to occur between
the funding of two ventures.
In their study, Riquelme and Watson (2002) compare VCs beliefs and theories about
attributes associated with success and failure with attributes actually observed for successful
and failed SMEs. The most important attributes associated with success, which they collected
from prior studies on successful SMEs, are managerial attributes (experience, ability,
complete team, organizational flexibility, cash/cost/location/strategy planning), marketing
36

practices (responsiveness to market, market niche or broad market, build company image),
product-related factors (competitive advantage) and financial resources. VCs mentioned a
balanced, determined and committed team with a good track record, a growing protected
market and a product with an above-average chance to succeed (competitive advantage,
patent protection). The most relevant attributes associated with failure of SMEs are
management inadequacies (inexperience, personnel problems, lack of planning), financial
planning and control problems (lack of initial capital, poor record keeping, poor internal
controls), marketing and product deficiencies (inadequate marketing, product/service
weakness (too old/new or inferior)), unfavorable economic conditions and fraud. VCs
considered lack of experience (managers cannot adapt to changing needs, incomplete team,
incompatible personality traits), the fact that things take longer than planned and a too
sophisticated product as potential reasons for a failure. Riquelme and Watsons (2002) overall
conclusion is that VCs beliefs and theories about attributes associated with success largely
match the actually observed attributes of successful SMEs, which allows the guess that VCs
base their decisions on the right selection criteria.
Achleitner, Kaserer, Wagner, Poech and Brixner (2007) find that the degree of innovation and
the market timing are crucial for venture success. Entrepreneur characteristics such as a solid
academic background may increase the degree of innovation and therefore the likelihood of
success (Achleitner et al., 2007).
Due to the numerous uncertainties and the high degree of unpredictability involved in
entrepreneurial projects, Lerner (2004) suggests that the entrepreneurs ability to adjust to
changes in the broader environment (trends, marco-economic events, etc.) is a critical success
factor.
A phenomenon that has received a lot of attention in previous research is the apparent
outperformance of decision aids compared to a VCs own assessment in the selection of high
potential investment proposals (Zacharakis & Meyer, 2000; Zacharakis & Shepherd, 2005). A
decision aid is a statistical model that decomposes the decision into its component parts
[and] helps the VC to focus on a series of smaller decisions (Zacharakis & Shepherd, 2005,
p. 677). As framework of reference for new investment proposals, the criteria and their
relative weights as determined from the past decision-making behavior of the VC are fed into
the model. The advantage that such decision aids have compared to a VCs own evaluation is
37

that they are consistent in their decision making and able to generate more accurate decisions
(Zacharakis & Shepherd, 2005).
What the authors in the field of decision aids usually did was calculating the aforementioned
hit-rate for the VCs own assessment and for the statistical decision model in order to know
which method worked best. As opposed to that, namely calculating the hit-rate for statistical
models based on espoused criteria, Mainprize et al. (2002) tried to create a model based on
known success attributes (attributes of viable ventures as they call it) that helps VCs to
standardize their evaluation of business plans. They suggest 15 decision cues to assess 6
attributes of viable ventures which are then used by the model to predict profitability and
survival of a venture. These attributes and decision cues are innovation (new combination,
product-market match), value (net buyer benefit, expected margins, sufficient expected sales
volume), persistence (potential for repeat purchases, long-term need, sufficient resources
available), scarcity (non-imitable, non-substitutable), non-appropriability (slack1, hold-up2)
and flexibility (uncertainty minimized, ambiguity reduced, level of core competence). Their
findings show that hit-rates were more consistent and accurate for their decision aid (based on
known, viable venture attributes) than for other models based on espoused criteria.
A research project led by Alperovych and Hbner (2008) analyzes the influence of the
compatibility between life cycle stages of the entrepreneurial company, its product and
external market factors on performance and returns of the portfolio company. Their main
result is that top performing portfolio companies have had much more favorable
combinations of external conditions and internal return factors to generate superior returns
and vice versa (p. 3).
And finally, even if espoused VCs investment criteria do not perfectly reflect known
attributes of successful ventures, they are useful for entrepreneurs in order to know what to
prioritize when applying for funding. As Kollmann and Kuckertz (2010) put it, a lot of
research studies done in the past have been more useful for entrepreneurs seeking funding
than for VCs looking for appropriate investment criteria that increase the likelihood of
picking successful ventures.

1
2

slack refers to waste and inefficiencies reducing the rents from a strategy position (Ghemawat, 1991)
hold-up refers to a re-distribution of gains among economic actors (Ghemawat, 1991)

38

2.1.4

Evaluation uncertainty and overconfidence

The majority of research that has been done on VC investment criteria during the past thirty
years focused on the relative importance of these criteria for VC investment decision making.
A recent study by Kollmann and Kuckertz (2010) analyzes a closely-related phenomenon,
namely the specific uncertainty associated with the evaluation of each single criterion at
different stages of the investment process. It is widely accepted that knowing about the
relative importance that VCs attach to the different criteria they use for assessing the quality
of an investment proposal is essential. However, if there is a high degree of uncertainty
involved in the evaluation of a specific criterion, VCs will probably be more careful in
supporting their investment decision with this criterion and rather concentrate on more
tangible and certain criteria. Kollmann and Kuckertz (2010) use search, experience and
credence qualities as a theoretical framework for their analysis. This theory enables the
description of goods by search qualities which are known before purchase, experience
qualities which are known costlessly only after purchase, and credence qualities which are
expensive to judge even after purchase (Darby & Karni, 1973, p. 69).
This framework can easily be used in the case of VCs who want to assess the quality of a
venture (the good) and who use a number of investment criteria which fall into either of the
three above-mentioned categories to describe the venture proposal. While a search quality
e.g. would be whether a venture is active in an industry of interest for the VC, which is easy
to determine with certainty, the effort and endurance of an entrepreneur would rather qualify
as experience quality. The real commitment of the entrepreneur however can never be
assessed with certainty and thus is a credence quality associated with a high degree of
uncertainty.

Figure 1: Search, experience and credence qualities and the venture capital process
(Kollmann & Kuckertz, 2010, p. 743)

39

As shown in Figure 1, the degree of uncertainty concerning the evaluation of the different
selection criteria decreases when moving from initial screening to thorough evaluation and
deal structuring in the venture capital decision-making process. This is reflected in the
proportion of search, experience and credence qualities used in the evaluation of the different
criteria. This decrease in uncertainty is probably due to a greater amount of time and effort
allocated to the evaluation of an investment proposal and a higher level of information
available during the course of the venture capital decision-making process (Kollmann &
Kuckertz, 2010). Kollmann and Kuckertzs (2010) main conclusion is that criteria related to
the entrepreneur or management team are of exceptional relevance but at the same time very
difficult to evaluate, especially in the early screening phase. Therefore, an important
suggestion they make to entrepreneurs is to be transparent, to collaborate closely with the VC
and to show preparedness and commitment right from the beginning in order to minimize
uncertainties as much as possible.
Zacharakis and Shepherd (2001) examine another phenomenon related to the VC investment
decision, namely the overconfidence involved in predicting the future success of new
ventures. Although VCs are considered as experts in this field, overconfidence often biases
their decision and significantly reduces their decision accuracy. For their study, Zacharakis
and Shepherd (2001) define overconfidence as the tendency to overestimate the likely
occurrence of a set of events (p. 311), which in the case of VC decision making is the
likelihood that a funded venture will succeed (p. 311). Their main findings show that
overconfidence increases with more information being available to VCs and with unfamiliar
framing of the information (i.e. information presented in a way VCs are not familiar with).
More information obviously suggests that better informed decisions can be made. However,
more information also makes a decision more complex, is often not fully considered and
consequently only increases confidence about and not accuracy of the decision.
There are several ways of reducing overconfidence which VCs should know about.
Counterfactual reasoning involves thinking about potential future deviations from
assumptions that a decision is based upon (some sort of what-if scenarios) and the humbling
effect occurs when negative feedback from past decision is received, which unfortunately
usually only happens years after an investment was made (Mahajan, 1992; Russo &
Schoemaker, 1992). Decision aids may also reduce overconfidence by increasing decision
accuracy (Zacharakis & Shepherd, 2005).
40

2.2

Specific objectives and selection criteria of public VCs

Governments play a major role for economic growth, the promotion of entrepreneurship and
venture firms and the development of the VC industry. They set the legal and fiscal
framework for investors and funds, boost or curb investments by private and institutional
investors and most important for this paper they often opt for direct public intervention
(Leleux & Surlemont, 2003; Oehler et al., 2007). This may mean creating a public fund or
being directly involved in private or corporate funds. When directly intervening in VC funds,
Leleux and Surlemont (2003) state that mixed constraints objective functions (p. 97)
characterize the public funds investment decisions. Governments pursue a number of
politically [and] socially motivated (p. 86) objectives like regional development, industry
restructuring or employment creation, which they try to combine with traditional private
sector return objectives in order to make their investment cycle self-sustaining. These
objectives however are often conflicting and hard to reconcile. If public VCs then decide to
give the priority to economic and social policy objectives, they may have a tendency to offer
capital at marginal (below market) rates of return to entrepreneurs (Leleux & Surlemont,
2003, p. 99).
Lerner (2004) suggests two important roles or objectives of public VC initiatives:
certification to other investors and encouraging of R&D spillovers. He argues that public
agencies should certify high-quality projects and give them a stamp of approval in order to
increase the confidentiality of other investors and make them invest. As private VCs have
shown to concentrate on a few industries currently en vogue, such a stamp of approval
could be interesting for industries that are rather neglected by private VC investors. A wellfounded criticism of this certifying role lies in the doubt about government officials being
able to overcome information asymmetries and to identify promising investment projects
while other investors apparently cannot, especially if those other investors are private VCs
with significant industry expertise. The criticism may however be unfounded, according to
Lerner (2004), if the other investors are e.g. bankers with little insight into the business of an
entrepreneurial firm and if those government officials are specialists and experts with
significant expertise and insight. In practice however, this last hypothesis does not always
hold. Nevertheless, a few years before, Lerner (1999) was able to detect a positive effect of
the public stamp of approval. He had studied the long-run performance of high-tech start41

ups that received funds from the public SBIR program in the US (awardees) and found that
those firms grew faster, showed a greater increase in employment and were more likely to
obtain additional independent VC finance in subsequent years than their non-publicly funded
peers. Although the SBIR program mainly works with monetary grants, the same effects are
to be suspected from public VC interventions with equity or quasi-equity instruments. The
second role of public VC initiatives, according to Lerner (2004), concerns R&D spillovers,
i.e. positive externalities generated by certain activities of a company. For instance,
innovations by a start-up company do not only benefit the company itself but may also create
positive spillover effects for competitors, developers of complementary products and
customers. The overall social and economic value of such spillovers may thus be a reason for
government agencies to intervene in the funding of certain projects.
According to a study by Beuselinck and Manigart (2007), direct public interventions play a
stabilizing role for the overall VC industry as they are less opportunistically driven by the
economic climate (p. 29). In addition, interventions by public VCs can stimulate investments
in those sectors or companies that may have difficulties to receive funding from private VCs
which emphasizes the complementarity of public and private VCs (Leleux & Surlemont,
2003; Beuselinck & Manigart, 2007). This objective of complementing the investments made
by private VCs seems justified given the positive economic impact of venture-backed firms
compared to firms funded with other types of capital in terms of employment creation, sales
growth and fostering of innovation (Amit et al., 1998).
Deloitte (2009) describes the role that governments play for the VC industry, including recent
trends. Governments always played an important role in fostering innovation and
entrepreneurship. This becomes even more apparent when looking at current industries of
interest for VCs such as cleantech or life sciences, which are regulated to a higher extent than
e.g. the IT industry. Favorable government policies and regulations are required to make
these areas develop and to encourage VCs to invest. Worldwide, VCs particularly stress the
importance of favorable tax policies and increased government support for entrepreneurial
activities (Deloitte, 2009).
The above-stated roles and objectives of public VC initiatives have an influence on their
investment criteria in that they add a number of criteria to those used by private VCs and may
change the relative importance and weighting of various criteria.
42

In addition to the influence of the specific objectives of public VCs, rules and regulations
established by national or supranational entities add additional investment constraints and
probably have an impact on selection criteria and their relative importance. Concerning direct
government intervention in Europe e.g., government-sponsored initiatives that support SMEs
have to make sure that they comply with European Union [EU] state aid rules (for more
information, see De Harlez, Schwienbacher & Van Wymeersch, 2008; European
Commission, 2009). These rules have been modernized in recent years in order to target
investments toward[s] objectives of the Lisbon strategy for growth, jobs [and
competitiveness] (European Commission, 2009, p. 4). Specific constraints, conditions,
regulations and administrative procedures apply e.g. to investments falling into the de
minimis (i.e. aids of small amounts) or the risk capital aid framework. The latter was put
in place in order to encourage the creation of VC funds and the investment in high-growth
SMEs. In addition, the European Union definition of SME has to be followed.
Summing up, the specific objectives of public VCs in contrast or in addition to the return
objectives of private VCs are the promotion of entrepreneurship and innovation, social
objectives such as job creation and maintenance, economic growth and regional development,
the attraction of new businesses and investors to a certain region, industry development or
restructuring and environmental objectives.

2.3

Trade-offs between various selection criteria

As many previous studies of VC selection criteria only tried to establish a hierarchy of


importance based on the traditional Likert scale survey method, Muzyka et al. (1996) used
another approach. After having identified 35 investment criteria in scientific literature, they
realized their own survey where about seventy VCs were asked to make trade-offs between
pairs of independent criteria. For all 35 criteria, they defined three trade-off options (e.g.
market size: large, medium, small or expected rate of return: <16%, 16%-25%, > 25%). They
then created 53 matrices, each containing two selection criteria with their three different
trade-off options. Respondents were then asked to rank each of the nine possible
combinations of trade-off options. Their results indicate that leadership potential, industry
expertise and the track record of the entrepreneur or management team are ranked among the
top 5 criteria, followed by a sustained competitive position, marketing/sales capabilities and
43

organizational/administrative capabilities of the team and the ability to cash out. Their
findings also suggest that the priority for VCs is a good business deal, even if it does not
perfectly fit with their investment strategy (e.g. round of investment) or their existing
portfolio. Geographical issues, i.e. the location of the business and its market relative to the
location of the VC fund, matter but are not the first element of consideration for decision
making.
A study by Sweeting (1991) found that UK VCs showed a certain preparedness to consider a
project with weaker management team if the business concept was otherwise sound good
product/market, proprietorial market position, good returns, and so on. He explains that this
was associated with the VCs themselves providing the necessary managers in the context of a
proactive management style. This is confirmed by Lerner (2004). Khanin et al. (2008) on the
contrary report what has acquired the status of conventional wisdom (p. 190) in the VC
industry: a more qualified (A) person with a worse (B) project is preferred to a less
qualified (B) person with a better (A) project. MacMillan et al. (1985) had been one of
the first to say that irrespective of the horse (product), the horse race (market) or the odds
(financial criteria), it is the jockey (entrepreneur) who matters most in the end. Zacharakis
and Meyer (1998) found that if little information about the market and the competitive
situation is available, then the entrepreneur matters most. If more information becomes
available to VCs, then their focus shifts from the entrepreneur to market characteristics.
Zacharakis and Shepherd (2005) found that prior start-up experience of the entrepreneur or
management team can substitute for prior leadership experience. In general, they observe that
leadership experience matters most to VCs in environments with a greater number of
competitors as a good leader can act and react to the many possible, and a priori
unforeseeable, competitive interactions (p. 684). The European Private Equity & Venture
Capital Association [EVCA] (2009) cites a quote of Bruce Golden from Accel Partners which
gives an answer to the following question: How to evaluate an entrepreneur with no track
record? He says that VCs then usually look at the history of success of the entrepreneur, i.e.
whether he had high impact roles in the past and whether he fulfilled his or her duty with
commitment and lead other companies to success.
Based on their findings, Chen et al. (2009) state that if an entrepreneur shows passion about
his/her project but his/her business plan, i.e. the whole package, does not have the necessary
44

substance, the deal will probably not be made. VCs tend to care about how prepared they
perceive an entrepreneur is (with regard to the business plan) to assess his or her passion.

2.4

Factors influencing the selection criteria and their relative importance

A number of circumstances both internal and external to the VC investment decision-making


process have shown to have an influence on how, and based on which criteria, investment
decisions are made.
2.4.1

The subdivision of the screening and evaluation phase

The decision-making process a venture proposal has to go through for evaluation before an
investment decision is made has been described by various authors as screening and
evaluation phase of the VC investment activity. Fried and Hisrich (1994) propose a six-stage
VC investment process including two different screening and two different evaluation phases.
Tyebjee and Bruno (1984) also provide a model of the decision process that contains a
screening and an evaluation step and Sweeting (1991) uses deal screening and deal evaluation
to describe this phase within the venture capital fund activity.
This screening and evaluation phase when regarded as one big part of the investment
decision-making process in turn comprises various sub-phases, as suggested by Fried and
Hisrich (1994). Their subdivision includes a VC firm-specific screen, a generic screen, a firstphase evaluation and a second-phase evaluation where each of these sub-phases can lead to a
rejection of the investment proposal if it does not meet the VCs investment criteria, which
may differ from sub-phase to sub-phase.
During the VC-specific screen, particular attention is paid to criteria such as investment size,
industry, geographical location and stage of financing (Fried and Hisrich, 1994). The generic
screen is done based on the submitted business plan and any relevant knowledge that the VC
may have related to the proposal, and usually only takes a few minutes. Hall and Hofer
(1993) found that go / no-go decisions during this initial screening phase only take an average
of less than 6 minutes.

45

For the subsequent, first-phase evaluation, VCs start collecting additional information on the
submitted investment proposal (Fried and Hisrich, 1994). They then meet and talk to the
entrepreneurs; some may even want to visit the entrepreneurs home and family in order to
get a feeling of the environment they live in. They check references, look at the financial
history if available and contact actual or potential customers. If there is no product on the
market yet, the product concept may be discussed with potential future customers or opinion
leaders. Sometimes, formal market research is carried out or in the case of very early-stage
investments a technical evaluation is made. Early-stage investors often also consult the
managers of their existing portfolio companies, especially if these companies operate in
closely-related industries (Fried & Hisrich, 1994, p. 34).
During the last sub-phase of the screening and evaluation process described by Fried and
Hisrich (1994), the second-phase evaluation, VCs spend an increasing amount of time and
effort on the proposal(s) that made it through the first phases and eventually develop an
emotional commitment (p. 34) to it/them. Here, the goal is no longer to investigate
whether the proposal is interesting or not, but rather to determine potential problems and to
find out how to solve them. In the beginning of this phase however, a good estimation of the
structure of the deal and the valuation is required in order for the VC to not waste time on an
irrationally high-priced investment proposal. After this second-phase evaluation comes the
closing of the deal including last detailed negotiations and the structuring of the investment.
The boundaries between these different screening and evaluation phases are usually not
clearly defined, but somewhere at the beginning of the above-mentioned first-phase
evaluation starts what is commonly known as due diligence. Worrall (2008) makes a
distinction between pre and post term-sheet due diligence, which approximately correspond
to Fried and Hisrichs (1994) generic screen and first- and second-phase evaluation,
respectively. While VCs make sure that the business plan and the technology are worth
further considerations before the term-sheet is set up, past term-sheet due diligence looks at
the company into much more detail, including corporate organization and history,
management and employee relations, intellectual property, financial and accounting matters if
available as well as information on sales plans, competition, public relations and R&D. She
also notes that each VC has its own due diligence checklist, which makes a broad
generalization difficult.

46

VCs spend 10 to 15 minutes on the initial screening phase according to a study by Sweeting
(1991). Hall and Hofer (1993) differentiate between initial proposal screening and proposal
assessment, which they found to take a maximum of respectively 6 and 21 minutes. For the
initial go/no-go decision, the fit with VC-specific guidelines and long-term growth and
profitability of the industry are the most important criteria. For the more detailed assessment,
according to Hall and Hofer (1993), the source of referral determines the degree of interest
accorded to a proposal.
2.4.2

First round vs. subsequent follow-up investments

VC capital infusions are usually staged, i.e. subdivided into various investment rounds, in
order to give VCs the opportunity to abandon investment projects periodically (Gompers &
Lerner, 2004). The initial due diligence process based on the various investment criteria
enumerated earlier decides on whether or not a VC invests in a project, i.e. participates in
the first round of an investment. Later on, close monitoring and information gathering enable
the VC to assess whether he wants to participate in subsequent investment rounds. As Lerner
(2004) explains, in addition to investing in several rounds, VCs may disburse funds in
tranches even within one round. This especially happens in the initial phase of an
investment in order to make sure that money is not squandered on unprofitable projects
(p. 9) or that even worse the entrepreneurs run away with it. Taking a board seat and
intensive monitoring of entrepreneurs then enable a VC to decide whether the next tranche of
capital will be allocated or not. Sometimes this also depends on the completion of certain
activities or the reaching of a milestone. Although the continuous evaluation of a projects
progress based on monitoring and information gathering enables the VC to get a good idea of
the projects development, a detailed analysis based on a number of criteria is often done
before participating in a subsequent investment round. These criteria may not be exactly the
same as the initial investment criteria used during the due diligence process, or at least the
focus of attention or the weighting may have changed.
2.4.3

Open-end vs. closed-end funds and related constraints

Petty (2009) argues that VC-specific constraints like available fund capital, the timing of an
investment proposals arrival relative to the maturity of the fund and the composition of the
portfolio at the time of the proposal (development stages of companies, geographic
47

concentration) may bring VCs to adjust the relative importance of their selection criteria over
the lifetime of their fund.
The first two constraints are mainly true for independent VC funds as they are usually closedend and therefore constrained by a pre-specified [liquidation] date (Van Osnabrugge &
Robinson, 2001, p. 27). With a liquidation horizon of about 7 to 10 years in Belgium
usually 10 to 14 years in practice , independent VCs can only invest in very early-stage deals
in the beginning of their funds lifetime as the time to exit may take up to 14 years and all of
their investments have to be exited by the end of the fund (Van Osnabrugge & Robinson,
2001). The last constraint rather applies to those funds who wish to diversify and balance
their portfolio, which may be the reason for rejecting several new proposals based on what is
already in the portfolio. When approaching the end of the investment period of a fund, VCs
may want to invest the remaining fund capital in projects that show synergies with existing
portfolio companies or rather in a way that enables hedging less promising existing portfolio
positions (Petty, 2009).
2.4.4

The source of referral

In his study, Petty (2009) considers the source of the proposal which may have an influence
during the decision-making process. Tyebjee and Bruno (1984) mention three different types
of deal origination: referral (referred deals or projects), cold contacts (cold calls by
entrepreneurs) or technology scans (active search for deals by the venture capitalist). One
could also organize the sources of the proposal into the following categories: passive sources
(direct from the entrepreneur, via intermediaries, via parent organizations or via portfolio
businesses), proactive sources (active search for existing combinations of entrepreneurs and
venture, putting together managements and ventures) or syndication (request to join from
other VCs) (Sweeting, 1991). Hall and Hofer (1993) emphasize the importance of the source
of the proposal, with proposals previously reviewed by persons known and trusted by the
venture capitalist receiving a high level of interest (p. 25). This is confirmed by B. Leleux
(personal communication, June 16, 2011).

48

2.4.5

Syndication and investment consortia

Fried and Hisrich (1994) sum up what several previous authors found out: VCs often
syndicate investments in order to share knowledge and pool their capital, which in turn allows
them to share the risk inherent in a project, and in order to invest larger amounts so that
follow-up investment rounds are covered. They say that during the first-phase evaluation,
VCs often talk to each other, especially when considering a syndication of the deal, which
finally influences how and based on which criteria the investment decision is made.
Hochberg, Ljungqvist and Lu (2007) state that VC networks (i.e. the reciprocal relationships
that a VC undertakes with other VCs) which are the basis for every syndication can
positively impact the performance of a fund. They found a significant positive relationship
between how well networked a VC is and the probability that its portfolio companies survive.
This probably is due to the main advantages of networking, namely the spreading of risks and
the pooling of expertise. Being well networked consequently increases popularity with both
limited partners (i.e. investors in the fund) and entrepreneurs and thus is of strategic
importance to VCs. Having highly skilled and experienced investment managers, showing a
strong track record of well selected and successfully supported investment projects as well as
reciprocal sharing of deal flow may help improve a VCs network position.
In a later study, Hochberg, Ljungqvist and Lu (2010) show that especially for cross-border
investments networks with local VCs are crucial as they enable foreign VCs to get access to
local investment projects. Local VCs typically are the first to discover a local investment
proposal and they then invite other, maybe foreign VCs from their network to join and
syndicate the deal. A foreign VC in the study of Mkel and Maula (2008) pointed out that It
is very important to be physically close. Geography and culture have an effect. We would not
invest without a local investor (p. 249).
In the language of public risk capital investors, syndication is also known as fund matching
(by private investors) (M. Olivier, personal communication, May 17, 2011). Public VCs
often only invest a maximum of X% of the total amount of capital needed by the
entrepreneur, provided that the other (100-X)% of the investment are matched by other,
usually private investors. Leleux and Surlemont (2003) on the contrary establish the
hypothesis that public VCs syndicate deals to a lower extent than independent VCs. This has
49

several reasons. Syndication is a mean of creating a diversified, balanced portfolio with a


limited amount of capital available to each of the VCs in the consortium. As public VCs often
work with open-end funds, they are not constrained by a limited capital base. Instead, as long
as interesting investment opportunities are presented to them, they can justify additional
capital to be injected into the open-end fund. Additionally, public funds often are generalists
with a broader focus, which enables them to diversify their portfolio without the aid of
syndication. And finally, a third reason for the above-stated hypothesis is that public VCs
have a mixed objective function (Leleux & Surlemont, 2003, p. 88). They pursue nonfinancial objectives in addition to or instead of the traditional return objectives of private
VCs, which may make investing in a consortium more difficult.
2.4.6

Prior investment by BAs or VCs and government subsidies

Bozkaya and Van Pottelsberghe de la Potterie (2008) find that 72% of the technology-based
small firms in their sample that received VC funding had benefited from business angel
funding before. Although apparently intervening at different development stages of the
venture, this suggests a certain complementarity of both types of investors something that
had already been observed by US studies in the past.
The awarding or certification role played by interventions of public agencies providing
among others risk capital to entrepreneurs has been examined by Lerner (1999), Lerner
(2004) and Gompers and Lerner (2004). Governments seem to have the ability to certify that
a venture is viable and worth additional investments by other, subsequent investors.
2.4.7

The compensation of fund managers

As mentioned by various authors (Fried & Hisrich, 1994; Van Osnabrugge & Robinson,
2001; Leleux & Surlemont, 2003), the traditional compensation of VC fund managers
includes an annual management fee of 2.5-3% of the funds capital and a carried interest of
20% of the capital gains realized on investments. While the management fee is considered as
a base compensation, the carried interest usually represents the biggest part of the fund
managers compensation and provides a variable, performance-based incentive (Meyer &
Mathonet, 2005). A hurdle rate makes sure that general partners are only compensated for
over-performance (Maxwell, 2003a as cited in Meyer & Mathonet, 2005, p. 33). This
50

compensation scheme is mainly used by private, independent VCs. Public and captive funds
however, which are often managed by civil servants and corporate employees respectively,
may not use the same compensation scheme. They instead work with fixed salaries according
to the pay scales of the civil service or according to industry standards, respectively, to
remunerate their investment managers. In this way, unfortunately, no financial incentives are
offered in the form of a variable pay that is linked to the performance of portfolio companies.
Or at least, as Leleux and Surlemont (2003) put it, the fee-based incentive package, common
in public institutions, creates different incentives than the profit-based incentives of private
VCs (p. 82).
The question may arise whether this difference in compensation and incentives may have an
influence on the scrutiny with which investment proposals are screened, i.e. on the severity
with which selection criteria are analyzed.

2.5

The impact of the recent financial and economic crisis

An element that studies conducted prior to 2007 were not able to take into account is the
impact of the recent financial and economic crisis at various levels of the VC investment
process from fundraising to investment decision making for new proposals and follow-up
investment decision making for already existing portfolio companies. The crisis may have
changed the context of venture capital investing. Fundraising e.g. may have become more
difficult, which in turn makes good investment decisions even more essential in order to best
use the capital that is still available. Consequently, the crisis may have had an impact on the
scrutiny with which selection criteria are used for screening and evaluating investment
proposals. On the one hand, concerning new investment proposals, the importance of some
criteria may have increased in order to make sure that only those projects with a higher-thanaverage chance to defy the crisis and its consequences are funded. On the other hand, certain
existing portfolio companies may have been directly or indirectly hit by the economic crisis,
which entailed and still entails higher follow-up needs for subsequent investment rounds as
companies were often forced to adapt their business model and to revise their strategy for the
years to come (H.-F. Boedt, personal communication, June 22, 2011). Although the recent
crisis has not yet been included in many scientific research papers about VC investing,
various national and international organizations as well as external consultants studied its
impact on the VC industry.
51

A worldwide study by Deloitte (2009) analyzed the expected effects of the financial and
economic crisis on VC fundraising among limited partners. While they found a huge expected
decrease in the willingness of banks to invest in VC funds, governments were expected to
increase their investments in this asset class. This suggests that VCs were and probably still
are looking to governments for assistance and support, with an emphasis on favorable tax
policies and increased government support for entrepreneurial activities (Deloitte, 2009).
Denis Lucquin (as cited in Ernst & Young, 2010) says that although the recent years were
characterized by a difficult exit environment, keeping the focus on the entrepreneur and
growing a company for its own sake (and not with the intention to achieve a trade sale) will
ultimately create awareness and interest on the part of potential buyers. He also emphasizes
that a VC should not change its investment strategy as a reaction to the crisis, which would
change its DNA and soul and make it get lost. It is important, according to Denis Lucquin (as
cited in Ernst & Young, 2010), to take the long-term nature of the venture capital activity into
account before engaging in short-term changes.
As regards Europe more specifically, the recent financial and economic crisis had an impact
on the European private equity industry at various levels, from fundraising, to investment and
finally divestment (EVCA, 2011). This includes venture capital, which is a subset of private
equity and refers to equity investments made for the launch, early development, or expansion
of a business (BVA, n.d.).

52

Figure 2: European private equity activity quarterly evolution


(EVCA, 2011, p. 2)

Figure 2 shows that, for Europe in general, one can observe a decrease in number and value
for all three private equity activities, fundraising, investment and divestment, with a trough in
the beginning of 2009. While investment and divestment took up again in the third quarter of
2009, fundraising remained at a rather low level. It however becomes apparent from Figure 3
and 4 that the impact of the crisis on private equity in general (including, venture, growth and
buyout capital) does not well reflect the impact on venture capital alone given that venture
capital only represents a small part of the private equity industry. The private equity curve
rather seems to be determined by buyout capital, which makes the biggest part of the private
equity industry.

53

Figure 3: Fundraising in Europe quarterly evolution


(EVCA, 2011, p. 5)

As specifically regards venture capital, the EVCA (2011) shows that fundraising already
dipped in the first half of 2008, took up again in the second half and fell to significantly lower
levels in the beginning of 2009 (Figure 3).

Figure 4: Investments in Europe quarterly evolution


(EVCA, 2011, p. 18)

When looking at figure 4, a slight rise in venture capital investments can be observed for
2008 even though the crisis was already fully under way. The decrease only starts in the
beginning of 2009, which suggests a delayed impact of the crisis on the European venture
capital investing activity.
54

These overall tendencies observed in Europe may not be equally distributed across the
various countries, but they still indicate a negative impact of the crisis in general.

2.6

Public vs. private VCs: A synthesis

Based on the review of the relevant literature (subsections 2.1 to 2.5), various hypotheses
related to the research questions of this paper have been established. These hypotheses will be
illustrated with the following diagram and synthesis, which summarize the above-presented
investment criteria, trade-offs, influencing factors and the potential impact of the crisis.
Expected differences between public and private VCs will be pointed out.

Others
Your gut feeling, intuition

Entrepreneur / Management team personality


Endurance, capable of sustained effort
Evaluate and react well to risk
Passion, motivation, commitment
Vision
Preparedness (business plan)
Entrepreneur personality (chemistry, fit)
Honesty, integrity

Contribution to policy objectives


Employment creation
Economic development and growth
Development of a specific region
Development of a specific industry
Foster innovation
Environmental objectives (green technologies,)
Attract other investors (to the region / investment)

Entrepreneur / Management team experience


Start-up experience
Leadership experience
Market familiarity, industry-related competence
Complete, balanced team (key positions filled)

VC-specific criteria
Alignment with geographical focus
Alignment with sector focus
Investment stage / Investment round
Investment size
Number and type of companies already in
portfolio
Reputation of other investors
Number of employees in venture firm
Spin-off (company or university)

Product or service characteristics


Proprietary technology
Product superiority (innovativeness, uniqueness)
Long-term need (product persistence)
Not easily imitated nor substituted

Market characteristics
Market size (reasonable) or niche
Market growth (significant)
Market acceptance, positive customer feedback
Market access (easy)
Ability to create post-entry barriers
Weak competition or competitive advantage

Financial characteristics
Entrepreneur / Management stake in firm
Required rate of return
Return > 10 x investment within 5-10 years
Path to exit (clear enough)
Degree of riskiness
Investment rounds until exiting

Category relatively more important to private VCs

Category relatively more important to public VCs

Figure 5: Synthesis of relevant selection criteria

55

Figure 5 gives an overview of the investment criteria that have been found most relevant in
previous research (see subsections 2.1 and 2.2). Generally speaking, entrepreneur /
management team personality and experience, product or service characteristics, market
characteristics and the VCs gut feeling are not expected to be relatively more important to
either type of VC, public or private. The same applies to VC-specific criteria, however with
the geographical focus and the number of employees in the venture firm probably being a
little more important to public VCs. Overall, financial characteristics (except for the degree of
riskiness) are expected to be relatively more important to private VCs. Isaksson (2007) makes
a direct comparison by pointing out that a project with a yet unclear exit strategy is more
likely to be funded by public VCs than by private VCs. The latter have to exit all investments
by the end of their fund and provide returns to investors, which is key for building up a
reputation and securing new funds. The contribution of an investment project to policy
objectives is expected to be of higher relative importance to public VCs.
When looking at university-related VC funds separately from public VC funds, certain
particularities are expected. University funds concentrate on university spin-offs or
sufficiently related projects. They often have a very narrow investment stage (pre-seed or
seed, maybe start-up), round (seed, series A and B) and size (smaller amounts of capital)
focus, which is expected to slightly lower the relative importance of a complete business plan
and an a priori complete and balanced team (as their often only is the scientific entrepreneur
in the beginning). The degree of riskiness for such early-stage projects being always high, this
does probably not play a major role for the investment decision. Due to their nature, one of
the main objectives of university funds is the commercial valorization of innovative
university R&D projects.
Concerning the various trade-offs between selection criteria suggested in subsection 2.3, a
priori, no specific differences between public and private VC investors are expected.
However, public VCs probably are more restricted than private VCs when it comes to a good
opportunity that lies outside their geographical focus.
As regards the influencing factors presented in subsection 2.4, public VCs are expected to
have different hard criteria which yield a go / no-go decision for investment proposals on
initial screening. No precise hypotheses are however established concerning these
differences. This also holds for potential differences between first round and subsequent
56

round investments. Most often, public VCs work with open-end funds and private VCs with
closed-end funds. It is hypothesized that additional constraints relative to the maturity of the
fund, the capital left in the fund and the composition of the funds portfolio influence a
private VCs investment decision regarding new proposals. Although prior research
established the importance of the source of referral, syndication or fund matching, prior
investment by BAs or other VCs and government subsidies for the investment decision, no
clear hypotheses could be established concerning the differences between public and private
investors. Only two reviewed authors (Leleux & Surlemont, 2003) suggested that public VCs
syndicate deals to a lower extent than private VCs. The incentive-based compensation of
private VC fund managers is said to have a positive influence on screening scrutiny and thus
on the quality of selected projects.
Obviously the financial and economic crisis changed the context of VC financing and had an
impact on VC fundraising, investment and divestment. This is confirmed by recent
publications in the field. Experts however suggest that the investment strategy (including
selection criteria) underlying a VCs investment decision should not be changed during such a
crisis. In addition, the supporting role that governments play in crisis times has been
highlighted.

57

58

3 Venture capital in Belgium


For the empirical verification of the hypotheses and assumptions established based on the
research questions and the literature review, a sample of Belgian public and private VCs will
be analyzed. Prior to that, the Belgian VC industry, including its historical development,
current situation and major players, should receive some attention.
Although the major source of external financing in Belgium is debt, the Belgian venture
capital industry is quite well developed (Manigart, Baeyens & Hyfte, 2002a; Manigart,
Baeyens & Verschueren, 2002b). The EVCA (2011) provides very recent information about
the Belgian venture capital industry in comparison to other European countries. In terms of
venture capital investments3 as a percentage of GDP in 2010, Belgium is on the 11th place
with 0.028%, which is only slightly below the European average. The 1st place is occupied by
Luxembourg with 0.088%, followed by among others the United Kingdom with 0.045%,
France with 0.042% and Germany with 0.029%.
More detailed information on the Belgian VC industry can be obtained from the BVA that
publishes statistics from the EVCA yearbook every year. The EVCA (2010) gives the
following information. In 2009, the Belgian VC industry counted 52 private equity firms of
which 27 were venture capital firms. The rest was buyout, i.e. growth, mezzanine and buyout,
and mixed firms, doing both venture capital and buyout deals. Of the total capital under
management ( 7,634 million), about 1.6 billion was held by venture capital firms in 2009.
From the new funds raised in Belgium in 2009, about 20% was raised by venture capital
firms. Compared to 2008, the value of VC investments has increased by nearly 40% in 2009,
part of which is due to an increase in the average deal size, especially for start-up deals
(EVCA, 2010, p. 129), part of which may also be due to the financial and economic crisis.
Venture investments have mainly gone to three sectors: computer and consumer electronics,
life sciences and energy & environment (cleantech). In 2008, venture capital investments
accounted for 40% [nearly 80%] of total private equity investments by value [by number of
funded companies]. In 2009, the situation had changed and venture capital investments only
accounted for about 20% [65%] of total private equity investments by value [by number of
companies]. From all private equity investments, about 96% were done by independent VCs,
3

Statistics are industry statistics, i.e. based on the home country of the private equity firm

59

3% by public VCs and less than 1% by captives (EVCA, 2010). No exact distribution is given
for venture capital investments alone. Alperovych (2011) suggests that the major public VC
players in Belgium account for about half of the venture capital-backed deals (p. 93).
The Belgian VC industry and its players have also been included in various studies, among
which e.g. Manigart et al. (2002a), Manigart et al. (2002b), Bozkaya and Van Pottelsberghe
de la Potterie (2008) and Alperovych (2011). Bastin, Hbner, Michel and Servais (2007)
more specifically studied the investment criteria that VCs in the Belgian regions of Wallonia
and Brussels use when evaluating biotechnology companies.
If before 1997, research evidence found no significant involvement of government-sponsored
initiatives in the funding of Belgian start-ups, Bozkaya and Van Pottelsberghe de la Potterie
(2008) could observe a significant portion of early-stage projects being supported by
government funds. Those differences can be due to differences in sample selection and study
period, but also to a number of new government programs that had been launched at the end
of 1997, including public venture capital. The findings of Bozkaya and Van Pottelsberghe de
la Potterie (2008) however need to be handled with care when assessing their relevance for
this paper as they did not only take into account venture capital provided by government
agencies but also all other types of funding like public grants or loan guarantees.
Nevertheless, they highlight the creation of new public VCs starting at the end of 1997
(OECD GD working paper n97 (1997) as cited in Bozkaya & Van Pottelsberghe de la
Potterie, 2008). This is confirmed by Beuselinck and Manigart (2007) who show that public
VC investments have almost tripled from a yearly average of 50 million (period 1989-1996)
to 165 million (period 1997-2003). No other country in Europe had such high public VC
investments during this period (Beuselinck & Manigart, 2007).
Overall, it seems that the involvement of independent, private VCs in the early stages of
entrepreneurial firms is underdeveloped in Belgium, which may lead to an equity gap and a
potential problem for entrepreneurs seeking funding. Removing potential obstacles like an
unfavorable legal and fiscal environment or an illiquid public market can be one way of
tackling this issue and developing the private VC activity in the future (Bozkaya and Van
Pottelsberghe de la Potterie, 2008). Another solution lies in the intervention of public VCs in
order to make up for the lack of private VC funds providing capital (Leleux & Surlemont,
2003), which apparently is the case in Belgium. Manigart et al. (2002a), Beuselinck and
60

Manigart (2007) as well as Alperovych and Hbner (2008) confirm a significant proportion of
public VCs in Belgium.
Attention must be paid, when talking about public VCs or public funds, to the difference
between publicly sponsored and publicly managed funds, both of which can be found in
Belgium. A publicly sponsored fund is a fund where all or a major part of the shareholders
are local, regional or federal government entities but the fund as such may be a private
corporation managed by non-state employees. A publicly managed fund however is entirely
or partly sponsored by local, regional or federal government entities and in addition managed
by state employees. Most frequently, the general term public VC fund is used to describe a
fund that is sponsored as well as managed by public entities.
Public funds supporting SMEs in Belgium have to comply with certain EU rules and
regulations, as already mentioned earlier (De Harlez et al., 2008; European Commission,
2009). In addition, specific constraints and regulations established by local, regional or
federal government entities in Belgium apply, depending on which public entity invested into
a specific fund. These constraints may e.g. regard the size of the venture, the geography of the
VCs investment (only in certain provinces or regions, usually the ones that sponsor the fund)
or the sector focus (several sectors are excluded from public VC investment). A number of
public VC agencies in Wallonia e.g. are only allowed to invest in those sectors mentioned in
the Lois dexpansion conomique (interview partners, personal communication, June-July,
2011). The specific constraints each public VC is subjected to are usually stated on its
website.
Manigart et al. (1998) make a statement concerning the required rate of return for investments
at different development stages of a firm observed in Belgium (and the Netherlands): 31-35%
for seed/start-up/early-stage investments, <25% for all later-stage investments. Compared to
what they found for France and especially for the United Kingdom, this is very low. The
question that is consequently raised is: why are (or rather have been, as the situation probably
is different today) required rates of return so low in Belgium? It might partially be due to an
influence from the Netherlands as both countries are looked at together, but it could also be
due to the existence of a significant proportion of public VC agencies in Belgium
(Alperovych & Hbner, 2008). Leleux and Surlemont (2003) suggest that public VCs often

61

require marginal (below market) rates of return in order to make financing more easily
available, which helps them achieve their political, economic and social objectives.
At this point, some differences between Wallonia, Flanders and Brussels should be
highlighted as well as the most important players (doing seed, start-up and early-growth
deals) in all three regions named. Overall, Wallonia seems to show a higher proportion of
public VCs than Flanders. Most private, independent VCs in Belgium are located in the
regions of Flanders or Brussels. This may be due to the history and economic development of
the different regions. After the Second World War, Flanders had surpassed Wallonia in terms
of economic growth and development. The Walloon region had been prospering during and
after the industrial revolution due to its coal and steel industry (The Economist, 1993). This
period however has been followed by a constant decline in economic power. Nowadays, the
Flemish region is richer than the Walloon region, with lower unemployment rates and higher
wages (Castanheira, Rihoux & Bandelow, 2011). Additionally, Brussels as one of the most
important cities in Europe is located in Flanders at least from a geographical point of view
(Castanheira et al., 2011). In 1993, the European Commission even put Wallonia on par with
Ireland, Greece, Portugal and Eastern Germany, which were among the poorest regions
within the European Commission (The Economist, 1993).
Among the most important public players, SRIW (Walloon region), GIMV (Flemish region),
SRIB (Brussels region), LRM (Limburg, Flemish region) and SOWALFIN (Walloon region)
can be named (Alperovych, 2011). Aside from GIMV, which is listed on the stock exchange
since 1997 (with a remaining government stake of 30%), all of them are fully controlled by
policy makers (Alperovych, 2011). SRIW and GIMV were established around the 1980s,
SRIB was set up in 1984, LRM in 1994 and SOWALFIN in 2002, which gives some of these
public players a decade-long experience in the industry (Alperovych, 2011).
In Flanders, another public player, PMV, can be found as well as numerous private players,
like e.g. Capricorn Venture Partners, Big Bang Ventures or Stonefund (for more information,
see BVA member list; Agentschap Ondernemen, 2009). In Wallonia, SOWALFIN is
subdivided into nine regional Invests: Hoccinvest, Invest Borinage Centre, Investsud,
Luxembourg Dveloppement, Meusinvest, Namur Invest, Nivelinvest, Ostbelgieninvest and
Sambrinvest (De Harlez et al., 2008). SRIW features several specialized divisions,
including SRIW Techno (merger of Technowal, CD Technicom and Wallonie
62

Telecommunication), SRIW Environnement,

SIAW (food industry), SOWECSOM

(conomie sociale marchande) and SOWASPACE. In addition to these public VCs, a few
private funds exist in Wallonia too, such as e.g. Start-IT (for more information, see BVA
member list; De Harlez et al., 2008).
Although a handful of research papers already looked at the Belgian VC industry and
included Belgian VCs in their analyses, only few studied the selection criteria used by
Belgian VCs to screen and evaluate investment proposals. This paper may thus be of
particular use to entrepreneurs seeking funding in Belgium, in order to know under which
circumstance and how to address the various types of VC investors. In addition, it may offer
valuable clues about general differences between public and private VCs as objectives and
selection criteria probably show certain similarities around the world. Nevertheless, a broad
generalization of the results of this empirical study should only be attempted with care due to
differences in history, structure and practices of the various national VC industries as well as
different legal frameworks and national cultures which may highly impact VC decision
making and the selection criteria taken into account in that context.

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64

4 Methodology
4.1

Sample construction

The geographical focus of the empirical study of this paper is on VC firms and funds active in
Belgium (Wallonia, Flanders, Brussels and the German-speaking Community). In order to
select potential interview candidates from the Belgian VC world, the following secondary
sources have been used: De Harlez et al. (2008); Van Sebroeck (2000); Agentschap
Ondernemen (2009) and Union Wallonne des Entreprises (n.d.). These databases contain
active as well as currently non-active companies and funds, which however was not apparent
from the information in the database.
In addition, this study only takes into account VCs that invest in early-stage (i.e. seed and
start-up) and early-growth ventures as obtaining financing is most difficult for an
entrepreneur during these stages and thus knowing about the investment criteria of potential
investors is most crucial. Moreover, selection criteria are different from those used to evaluate
later-stage companies. Concerning later-stage investments, accounting information e.g. plays
an important role for valuation purposes whereas such information usually is not available for
earlier investment projects. These are rather evaluated based on more intangible information
like quality of management team or product and market characteristics (Manigart et al.,
1998).
54 potential interview candidates have finally been chosen out of the above-mentioned lists,
always bearing the investment stage focus in mind. To make sure that the right persons at the
selected VC firms and funds are contacted, i.e. those involved in the investment decisionmaking process, e-mails have been directly sent to the investment managers, members of the
investment committee or advisory board. If establishing such a direct contact was not
possible, an appropriate person to answer our questions has been identified by contacting the
VC firm. A short explanation of the research project and its objectives as well as information
about the practical execution of the empirical study has been provided to the potential
interviewees. Within two months after the first round of e-mails, certain VC firms have been
contacted again by phone in order to remind them of the participation in this study. With a
response rate of approximately 30%, the final sample used for data collection contains 15
65

providers of risk capital in Belgium. In consideration of the fact that the potential interview
candidates that have been contacted comprised active as well as non-active VCs, the true
response rate for active VCs is higher than 30%.
The Belgian VC industry is heterogeneous in terms of source of funding (public, private,
captive or a combination of these), type of fund (open-end or closed-end), geographical focus,
sector focus including generalists and specialists, investment stage and round focus,
investment manager compensation, etc. (Bastin et al., 2007; De Harlez et al., 2008;
Agentschap Ondernemen, 2009; Alperovych, 2011). An attempt was made to collect an
equally heterogeneous sample. However, as convenience sampling has been used, the
generalization potential of the survey results is limited for the Belgian population and even
more so for the worldwide population of VCs.
The final sample of 15 venture capitalists comprised 5 private VCs, 3 university-related VCs
and 7 public VCs. As a clear classification proved difficult for some VCs, the various
elements differentiating private, university and public funds have been considered and the
concerned VCs were placed into the category that best represents their characteristics.
Usually, the organization and type of management of a VC (whether private or public)
matters most for making the difference and not so much the type of investors in the fund. To
give an example, a fund with a public-private shareholding structure (50-50) that is part of a
public entity and managed by state employees will be considered as a public VC for the
purpose of this study. On the contrary, a fund where the majority of the capital is provided by
public entities but which is independently managed as a private company will be considered
as a private VC. In addition, the information provided and the classifications established by
De Harlez et al. (2008), Van Sebroeck (2000), Agentschap Ondernemen (2009) and Union
Wallonne des Entreprises (n.d.) have been consulted in order to verify the appropriateness of
our reasoning and classification.

4.2

Data collection

The primary source for data collection has been personal face-to-face interviews with private
and public VCs as well as university funds. Two interviews have been carried out by phone
due to time constraints that made a personal meeting impossible. The interviews were
supported by a semi-structured questionnaire with closed-ended and open-ended questions
66

(see Annexe I) that was sent to the participant up-front to enable them to be best prepared for
answering the questions. Before submitting the questionnaire to the interview partners, it has
been reviewed by a researcher as well as several experts and practitioners in the field to make
sure the terminology and wording of the questions as well as the logical construction of the
questionnaire was appropriate.
The questionnaire included several questions concerning the funds objectives, the relative
importance of selection criteria that proved relevant in prior studies, trade-offs between
various selection criteria, internal or external factors influencing the investment decision, the
impact of the recent financial and economic crisis and demographic information about the
interviewee and the VC firm and fund.
As far as selection criteria are concerned, a closed-ended question in the form of a list of 43
criteria, grouped into 8 categories, has been suggested with the possibility for the
interviewees to comment on each criterion and to add any additional criteria that they might
consider important. Particular attention has been paid to presenting a carefully compiled list
of selection criteria, the most exhaustive possible, to the interviewed VCs and to being clear
and unambiguous in the definition of each criterion. The final list was based on those
investment criteria that proved relevant in prior research studies. The interviewees were asked
to rate the importance of the different criteria on a five-point Likert-type rating scale. The
levels of measurement were chosen in a way that each step up the scale represents a distinct
and clear increase in the importance of the criterion (MacMillan et al., 1985) and were based
on suggestions by Siegle (2010): 1 = unimportant, 2 = of little importance, 3 = moderately
important, 4 = important and 5 = very important.
All other questions were open-ended in order to obtain rich data from the respondents while
allowing the conversation to explore new issues emerging in the interview (Mkel &
Maula, 2008, p. 246).
With the exception of two participants who declined to be taped, all interviews have been
tape-recorded in order to complete the hand-written field notes that were taken during the
interview if necessary. Each interview lasted between 60 and 90 minutes.

67

In an attempt to reduce the effect of the apparent lack of insight that VCs have into their own
decision making (Zacharakis & Meyer, 1998), the respondents were encouraged to think of
the most recent investment proposal(s) they decided to invest in. This way, they had one or
more concrete examples in mind of them taking investment decisions instead of simply
guessing how they take investment decisions in general. In addition, they were asked to
consider and reflect on the whole screening and evaluation process an investment proposal
has to go through, from VC firm-specific screen and generic screen to due diligence (firstphase evaluation and second-phase evaluation) and closing (Fried & Hisrich, 1994). Mason
and Stark (2004) noted that a lot of questionnaire and interview surveys about venture
capitalists selection criteria do not take into account the fact that the relative importance of
the selection criteria may change when moving through the different phases of the screening
and evaluation process. In an attempt to tackle this issue, interviewees were asked if they
considered that the relative importance of any of the criteria changes when moving through
the different phases of the screening and evaluation process, i.e. whether several criteria are
more important for the initial in or out decision (hard criteria that are always checked at
first) and several other criteria receive greater consideration during the detailed due diligence
process.

4.3

Method of data analysis

Initially, a comparison between public and private VCs regarding their investment criteria
was intended. However, during the literature review and the interviews with VCs, the
particularities of university-related VCs (university funds) became apparent and finally made
us consider them separately although, when looking at their structure and investment
behavior, they may be considered public rather than private.
During the 15 interviews (5 with private VCs, 3 with university-related VCs and 7 with
public VCs), quantitative as well as qualitative data has been collected (as can be observed by
studying the questionnaire in Annexe I). For this reason, two different methods have been
used for data analysis.
The quantitative data was obtained from the assessment of the relative importance of
selection criteria. As a relatively small sample of 15 VCs has been used, the focus of analysis
is on descriptive statistics and in particular on showing the central tendency of responses
68

obtained from the various types of VCs. The Belgian population of active VCs is quite small
too, which gives the descriptive statistics a little more power in describing Belgian VCs.
Given that a Likert-type rating scale has been used for the assessment, data must be
considered as ordinal (Jamieson, 2004). Assuming an interval scale for the response values in
Likert scales is illegitimate because the intervals between values cannot be presumed
equal (Jamieson, 2004, p. 1217) and consequently, using the mean to measure the central
tendency is considered inappropriate by many experts. Nevertheless, the mean allows for a
more subtle differentiation between the three types of VCs (compare Figure 6 with Figure 7,
Annexe II). For this reason and as no major differences in tendency could be observed
between Figure 6 (arithmetic mean) and Figure 7 (median), the arithmetic mean is used for
the analysis of our quantitative ordinal data. This has also become a common practice among
researchers (Jamieson, 2004). It should still be noted that this practice is not perfectly
legitimate.
The qualitative data obtained from the survey was analyzed by grouping field notes according
to the type of VC (private, university or public) and by subsequently comparing responses
within and between groups in order to detect similarities and differences. While inter-group
comparisons particularly tried to detect differences between the three types of VCs, intragroup comparisons were performed to check whether answers within a group were
sufficiently homogeneous to attribute the detected differences between groups to the type of
VC.

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70

5 Results and discussion


5.1

Selection criteria

Our findings suggest various striking differences in relative importance attached to the 43
selection criteria between private, university-related and public VCs (Figure 6).
As regards the entrepreneur / management team personality, the formal business plan
seems more important to public and university-related VCs than to private VCs. One private
VC noted that the details in a business plan are always wrong anyway because things
change continuously. He said that having a clear business model in mind and understanding
the industry and market dynamics is much more important than the exact numbers of a
business plan. All three types of VCs agree about the essentiality of honesty and integrity,
two personality traits that are often assessed by checking references and contacting former
employers or colleagues. Endurance and sustained effort, the handling of risk as well as
passion and commitment were commonly considered important but also difficult to evaluate
before an investment is made. One private VC added a criterion to this category, saying that
the ability to listen and to take criticisms into account was crucial. In direct comparison with
the other seven categories of criteria, the entrepreneur / management team personality is
considered most important by all three types of VCs. This is in accordance with many
previous studies in which entrepreneur and management team characteristics were found to
be most important.
For the entrepreneur / management team experience, the only striking difference was
observed for the complete and balanced team. Public VCs consider a complete and balanced
team more important than private and university-related VCs. This may indicate that public
VCs are less inclined to actively search for missing management team members and focus on
supporting existing teams with money and advice rather than building teams. This comes
along with a potential lack of manpower given the considerable number of projects a public
agency may finance. In comparison, private VCs usually have a maximum of ten to fifteen
companies in their portfolio. Nevertheless, some public VCs said they had no problem with
helping fill one vacant position. The slightly lower importance of this criterion to university
funds may as expected relate to the rarity of an existing balanced team at pre-seed or seed
71

Figure 6:: Relative importance of selection


selectio criteria arithmetic mean
(1 = unimportant to 5 = very important)

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stage. Prior start-up or leadership (management) experience was considered a plus but
something that can also be learnt on the job. A difference was made between both because
often, good entrepreneurs (scientists, IT specialists, etc.) are not good leaders or managers.
Within the category of product and service characteristics, proprietary technology (i.e. a
protected or protectable product) seems to outweigh the other criteria. Proprietary technology
seems to be very important to all VCs given that this can be the main source of a competitive
advantage and can protect from product imitations especially in the beginning of a
products life cycle. This is coherent with the importance attached to the competitive
advantage by all VCs. In addition, product superiority, which is also related to the
competitive advantage, is considered absolutely key by private VCs. A long-term need of the
product and a protection against imitations is slightly less important and matters least to
university-related VCs, which may be explained by their intervention in the very early stage
only. Often, they only support and accompany a spin-off in the pre-commercialization phase,
until it is e.g. sold to a bigger company by means of a trade sale. Imitations and substitutes
are rather something that later-stage investors have to care about, said one university-related
VC. Nevertheless, chances for product persistence may be of interest during negotiations with
a potential buyer or later-stage investor.
Market characteristics seem important to very important, especially market size, market
growth and market acceptance. While university funds attach a slightly higher importance to
all three criteria, they are closely followed by private and public VCs in a way that no major
differences could be detected. The ability to create post-entry barriers seems somewhat less
important. A competitive advantage on the contrary is considered very important, especially
by private and university-related VCs. Respondents had been asked for the relative
importance of the selection criterion weak competition or competitive advantage. During
the interviews however, it became obvious that both criteria have to be treated separately.
Most VCs, whatever their type, preferred a competitive advantage in a competitive market
over a market with weak competition because competition in general was seen as good and
stimulating. Many VCs noted that weak competition could even be a sign for a market that
does not exist or that is not attractive at all.
In line with what was expected, financial characteristics such as meeting the required rate of
return or obtaining a multiple of ten on the investment within 5 to 10 years are most
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important to private VCs and least important to public VCs. The entrepreneur / management
stake in the venture firm is slightly more important to public VCs. Some of the public
interviewees explained that they want the entrepreneurs to keep control over their company
and to have an interest in making it grow and prosper. The best way to do so is by making
sure the entrepreneurs keep a majority stake in the company. One public VC said that they
e.g. offer option plans for the companys management team as an incentive. A high degree of
riskiness is least frightening to university funds, which seems easily understandable as per
definition, they invest in the most risky stages (pre-seed and seed). Public VCs appear most
risk-averse. Surprisingly and contrary to what Isaksson (2007) says, with our sample, we
found that a clear path to exit was slightly less important to private VCs than to public and
university-related VCs. This is highly surprising given the closed-end type of fund private
VCs work with. It is however in line with the private respondents statements about a not
always existing or at least not fully binding exit clause in the shareholders agreement. Out of
five interviewed private VCs, only one said that an exit clause is always mandatory. The
others explained that sometimes, it is difficult to be sure about when and how to exit at the
time of the initial negotiations and that only some sort of exit clause is used to show
seriousness about the exit. A certain flexibility regarding the exit clause was also noticed on
the part of public and university-related VCs, which makes the statement given above less
relevant for explaining the observed differences. Regarding the investment rounds until
exiting, this seems moderately important to all three types of VCs. One VC noted that, as
long as one has enough capital to participate in subsequent investment rounds and to not get
diluted, the number of rounds until exiting is of little importance.
Concerning the VC-specific criteria, each criterion should be considered separately. A
projects geographical location seems important to all VCs as proximity is key for developing
a good relationship with the entrepreneur / management team and for monitoring the daily
activity of the portfolio company. Public VC investors however are particularly concerned
with their geographical focus when screening investment projects. Most of the time, public
VC funds are sponsored and managed by local, regional or federal government entities that
want to develop the economy of their territory. This is why they would not invest their money
out of their territory. The sector focus is of little importance to university-related VC funds.
The reason could be that such funds are usually attached to a university and therefore obliged
to choose good projects out of what comes out of the university, which only allows for a
limited amount of deal flow. Due to this limitation, an additional focus on specific sectors
74

would drastically reduce the pool of good investment opportunities. University funds most
meticulously respect their investment stage / round focus as well as their pre-determined
investment size. Some public VCs said that even if their start-up department or start-up
fund quit an investment at a certain stage or round, another later-stage department or fund
would take over in order to participate in the follow-up rounds. As regards investment size,
many of the interviewed VCs work with a minimum and/or a maximum amount of capital
invested per portfolio company. The latter in particular enables the creation of a welldiversified portfolio. The number and type of companies already in the portfolio seem to be
slightly less important, with, however, private VCs emphasizing their intention to diversify
their portfolio. Some VCs, predominantly private ones, mentioned that they would not invest
in directly competing companies, which makes sense given that this could create severe
conflicts of interest. As regards the reputation of the other investors in a deal, this seems very
important to all types of VCs. With the exception of a few, all interviewed VCs regardless
their type prefer syndicating investments, i.e. investing in consortia. In such a case, coinvestors with a good reputation and track record increase the likelihood of a well-structured
and -managed deal and help attract new investors for follow-up investment rounds. One VC
stressed the importance of knowing with whom you go to bed and several others put the
emphasis on mutual trust among co-investors. The number of employees in the venture firm
is unimportant to private VCs but rather important to public VCs. On the one hand, public
VCs probably go for companies with a high potential for job creation. On the other hand, they
are usually constrained in their investment by the EU definition of a SME, which allows for a
maximum of 250 employees. In any case, for early-stage and early-growth projects, the
number of employees in the venture firm is usually rather small and rarely attains 250. Except
for university funds, it is not decisive that the investment proposal concerns a university or
corporate spin-off. For university funds however, the fact that a project originates from a
university or is strongly related to a university is an essential investment criterion.
The next category of criteria, consolidated under the heading contribution to policy
objectives, is relatively more important to public VCs just as expected. Employment
creation, economic development and growth and the development of a specific region are
most important to public VCs, followed by university funds (moderately important) and
private VCs (of little importance to unimportant). This is perfectly in line with the objectives
of the different types of VCs. Private respondents emphasized the return for their investors,
expressed either in terms of IRR (internal rate of return) or multiple, and their own return, in
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dependence of fund performance. The public VCs on the contrary said they concentrate on
the achievement of economic and social objectives while trying to obtain a reasonable return.
One public VC pointed out that although economic and social objectives prevail, public risk
capital providers are no charity. Several private VCs added that if public investors are
among their shareholders and capital providers, some consideration may be given to the
public investors preferences regarding e.g. the geographical focus at least for part of the
funds capital. The development of a specific industry seems to be much less important,
especially to university funds. This is also reflected in the practically non-existing sector
focus of university funds which has already been addressed before. Fostering innovation is a
criterion to which also private and university-related VCs attach a certain importance given
that this indirectly contributes to their respective objectives. While innovation is often related
to future returns and thus contributes to the private VCs financial objectives, universityrelated VCs by definition promote and valorize innovation originated from universities. This
explains why both types of VCs consider this criterion as moderately important.
Environmental objectives apparently receive more and more attention since the trend is
toward green today but they are not yet a decisive criterion in the investment decision-making
process. The attraction of other investors seems to matter most to public VCs, probably
because this further develops a regions or countrys economy. Generally speaking, some
private VCs mentioned that the contribution to policy objectives criteria are not considered
as selection criteria by their investment managers but rather as a positive consequence of a
good investment.
The last criterion is the gut feeling and the intuition of the VC or VC investment committee.
The rating slightly varies between moderately important and important but no clear-cut
difference between the three types of VCs can be established. Overall, it seems that private
VCs attach a higher importance to objective facts than to their intuition or subjective feelings.
Some VCs explained that ones personal year-long experience helps develop a certain
intuition which is always helpful when collecting, reading and evaluation facts and figures
about a venture. The gut feeling is then usually based upon all this objective information
which enables the VC to take a well-founded decision that is in line with his/her subjective
feelings about an investment proposal.
The evaluation uncertainty treated by Kollmann and Kuckertz (2010) clearly had an impact
on data collection for this study. All respondents mentioned at least once that the relative
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importance of a criterion was difficult to evaluate as there was a very high degree of
uncertainty involved in the evaluation. Although the criterion as such was considered
extremely important, it was less important for decision making as it was just too difficult for
the VC to evaluate. Among the 43 selection criteria presented to the interviewees, only a few
seem to be true search qualities, such as e.g. the alignment with the geographical or sector
focus or the existence of a product protection (Kollmann & Kuchertz, 2010). The others are
mostly either experience qualities or credence qualities. While an educated guess about
honesty and integrity (which are general personality traits) can often be made by talking to
former employers or colleagues, it is very difficult to evaluate whether an entrepreneur is
capable of sustained effort or able to react well to risk before an investment is made and the
project evolves. A high degree of uncertainty also concerns the future development of the
market and the industry. Whether there is a long-term need for a product cannot be
determined with certainty until after a new product (often with a better or cheaper technology
or design, manufactured with a more efficient procedure or presenting another substantial
advantage) is developed and the older product becomes obsolete. In such cases of evaluation
uncertainty, the VCs experience and gut feeling may be helpful but it cannot totally eliminate
the uncertainty a certain risk regarding the future outcome will always remain.
As regards investment criteria in general, several public and university-related VCs
mentioned that they have the intention to be more severe regarding some criteria in the future.
These criteria included e.g. a reasonable rate of return and a more clear path to exit. In the
past, they had sometimes felt that failed projects could have been identified earlier by doing
an even more rigorous analysis in these areas. Some of them which are currently not
employing a performance-based compensation model are considering this for the future in
order to create proper incentives for their investment managers.

5.2

Trade-offs

The majority of respondents, whatever their type, emphasized the difficulty of evaluating
certain suggested criteria independently and often commented on their rating with it
depends. For instance, weak competition is not important as long as there is a sustained
competitive advantage. A long-term need (i.e. product persistence) is less important if e.g. a
highly profitable niche market with substantial margins is served during a few years or if the
entrepreneur already thought about potential product extensions or further developments of
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the technology. Market size is only important if there is no more growth to expect. This
validates the trade-off method used by Muzyka et al. (1996), who took exactly this difficulty
into account and tried to circumvent it. In addition, some interviewees explained that the
importance of certain criteria may vary from project to project and particularly depends on
the industry a firm is in.
Regarding the five trade-offs suggested to the respondents during the interview, the observed
differences between private, university-related and public VCs will be presented below.
A good investment opportunity that does not fit the VCs investment strategy in terms of
geography, sector, stage, round and size will rather not be considered by all three types of
VCs. Although a certain flexibility exists regarding some VC-specific criteria, a few of them
are knock-out criteria. For public VCs, geography in particular is a knock-out criterion.
Various sectors are also excluded from investment (e.g. by the Lois dexpansion
conomique), as well as companies considered as in difficulties. In addition, their
investments are constrained by supranational regulations like the de minimis rule
established by the European Commission or the European Union definition of a SME. For
most VC- and fund-specific criteria however, public VCs commented that they may under
certain circumstances get the authorization to make an exception. Private VCs specialized
on a certain industry of course consider their sector focus as knock-out criterion. Apart from
this, they appear rather flexible and a real case-by-case analysis decides on acceptable tradeoffs. University funds mainly mentioned the investment stage and round as hard criteria
because they are focused on the pre-seed, seed and start-up phase. In addition, a (geographic)
link with their university and potentially excluded sectors (due to their public investors) may
refrain them from considering a good investment opportunity. Overall, it seems that contrary
to the findings of Muzyka et al. (1996), VCs stick to (some of) their hard criteria and may
consequently reject good proposals or transfer them to another personally known VC firm.
Regarding the trade-off between jockey (entrepreneur / management team) and horse
(business concept), no clear differences could be detected between the three types of VCs.
Overall, respondents said that both are important and that the trade-off is different from
investment proposal to investment proposal. Although the management team seems crucial,
VCs are often willing to help complement the team or define this as a milestone to be reached
within X years in order to decide about a follow-up investment round. Some VCs said that
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both the management team and the business concept can be complemented, adapted or
changed depending on micro- and macroeconomic developments. An important issue
however is to always make sure that an entrepreneurial person is complemented with a
management person because often, good entrepreneurs are not good managers.
When asked whether leadership experience can make up for start-up experience, there was
no consensus among respondents from different types of VCs. In each category, some said
yes, others no. It was noted that few serial entrepreneurs with prior start-up experience exist
in Belgium and that leadership (managerial) experience is better than nothing in such a case.
Nevertheless, both types of experience are completely different and being in a leading
position in a big industrial company makes other demands than setting up a start-up business.
With our sample, no clear preference on the part of any type of VC could be detected for this
potential trade-off.
Regarding the existence of particular skills and knowledge on the part of the management
team that could make up for high competition, VCs believe that an innovative commercial
strategy (a smart approach) together with a proactive management style can handle a highly
competitive industry or market. Nevertheless, some of the VCs whatever their type
mentioned that a good team and an excellent strategy may not be sufficient. Often, a
competitive advantage based on intellectual property rights and as higher competition
means higher risk an appropriate IRR or multiple are required. No striking differences could
be observed between the three categories of VCs.
When it comes to the trade-off between entrepreneur passion and preparedness (business
plan), again no clear difference between private, university-related and public VCs was
detected. It seems that both are absolutely necessary and complementary. Nevertheless, while
passion is an absolute prerequisite to become an entrepreneur (wake up and go to bed with
it), VCs may provide some help with putting the business plan into format. As long as a
good business model and a clear vision are there, the formal writing of the business plan may
happen in collaboration. If however the business concept is missing the necessary substance,
in accordance with Chen et al. (2009), then the project will probably be rejected.
Overall, it seems that the potential trade-offs analyzed within the context of this study do not
depend on the type of VC (private, university-related or public). Probably, trade-offs are
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rather influenced by each VC firms preferences, the experience with past investment deals
and other factors.

5.3

Influencing factors

As expected, there are differences between in or out criteria (i.e. hard, knock-out
criteria) that are used for doing a first pre-selection during the initial screening phase and
those criteria that are used for a more thorough evaluation. Private VCs especially mentioned
VC-specific criteria, an existing market and market need as well as a proven technology,
preferably protected or protectable. One private VC added a clear exit strategy and the
honesty and integrity of the entrepreneur, which they always judge first by checking
references. People who had to do with fraud in the past are immediately out of consideration.
University-related VCs enumerated similar initial knock-out criteria and place the emphasis
on a proven technological and industrial concept and its competitive advantage compared to
what already exists (its differentiator). Public VCs in a first instance especially consider the
constraints established by the sponsoring public entities (e.g. geographical focus or SME
definition) and pay particular attention to companies in difficulties which are automatically
excluded from investment. In Wallonia e.g., a special public agency called SoGePa is among
others responsible for such companies. In addition, the investment size, an analysis of the
freedom to operate (related to intellectual property rights of third parties) as well as the
business plan in general matter during the initial screening phase of public VCs. During the
more thorough evaluation that follows the initial screening phase, investment proposals are
looked at in more detail, including frequent person meetings with entrepreneurs and an indepth analysis of the business model. The major differences between private, universityrelated and public VCs regarding the criteria used during this more thorough due diligence
phase become apparent from studying the results in subsection 5.1.
Concerning the initial screening phase, one interview partner emphasized that interest in a
project is detected within 5 minutes after checking VC-specific criteria and skimming through
the business plan, which is coherent with the findings of Hall and Hofer (1993) and Fried and
Hisrich (1994).
For interesting proposals with serious problems (Fried & Hisrich, 1994) encountered during
this initial screening phase, interviewees made a difference between problems that could be
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overcome if tackled appropriately and problems that most often lead to a rejection. In the first
case, depending on the severity of the issue and the difficulty of solving it, the VCs would
either discuss the existing problems with the entrepreneurs and help find a solution or ask
them to come back within a certain delay after significant changes have been made. For the
second case, a rejection of the proposal was considered the only possible outcome.
Although the evaluation of a venture for a first round investment is different from the
evaluation of the same venture for a follow-up investment, no major differences in approach
could be detected between the three types of VCs. All VCs stressed that before a first round
investment is made, they conduct a thorough due diligence during which all relevant elements
and criteria are evaluated. In the following, an active hands-on approach (taking a board seat,
organizing frequent meetings or requiring periodic reports) allows for a continuous checking
and evaluation. In addition, most VCs perform another thorough evaluation of the venture
firm and its development before investing in subsequent rounds. This however is easier and
faster than for the initial due diligence process as they now have easy access to information
and are familiar with the venture and its entrepreneurs. Both approaches (continuous checking
and thorough reevaluation) enable the VCs to see whether defined milestones have been
reached and whether another investment round is worth it. Sometimes, as a venture firm
matures, financial data and reports gain in importance for the decision on follow-up
investments.
Regarding the type of fund (open- or closed-end), the following distribution across type of
VC and type of fund can be observed for our sample (Table 1). Although private VCs usually

Private VCs

University-related VCs

Public VCs

Closed-end fund

Open-end fund

TOTAL

Table 1: Sample segmentation type of VC / type of fund matrix

work with closed-end funds, 3 out of the 5 interviewed private VCs in our sample use openend funds. Several comments should be made about this observation. First of all, 2 out of the
5 private VCs have been classified as private because this category best represents their
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overall characteristics and investment behavior. Nevertheless, they may have shown a few
characteristics of public or captive VCs, among which the type of fund. Aside from that, one
private VC explained that they use an open-end fund in order to not be constrained to exit
within the traditional 10 to 12 years. This is extremely advantageous as it prevents the end of
a fund to coincide with a crisis and a general economic downturn, which would involve a
tough exit environment and a pressure on prices. With an open-end fund, the VC is free to
wait for the best moment to exit an investment. For a closed-end fund on the contrary, several
additional constraints exist that may have an influence on the selected investment projects.
Investments in new projects are often only made during the first 5 years of the funds lifetime
and during the next 5 to 7 years, solely follow-up investments in already existing portfolio
companies are considered. In any case, a project whose exit is estimated to take 10 years will
not be considered in year 4 or 5 of the funds lifetime as the VC will not be able to exit it on
time. Another constraint regards the available fund capital. Once a closed-end fund is closed,
the amount of capital available for investment is fixed. The advantage of an open-end fund is
that if an interesting investment opportunity arises, the VC may ask the investors to increase
the committed capital. The public VCs in the sample, as expected, all work with open-end
funds and thus are less constrained by a projected end of the fund and a limited amount of
capital. The capital (including potential returns) obtained from an exit is recycled and used
for subsequent investment projects (revolving or rolling fund). This gives the public VCs
an additional flexibility for the selection of investment projects. Nevertheless, some public
VCs said that regarding the funds capital, their fund has been closed at a certain point in
time, with new capital entering the fund after that date being an absolute exception that has to
be authorized. The interviewed university-related VCs reported to work with closed-end
funds, which involves all corresponding constraints. Compared to the private VCs however,
they usually have multiple closed-end funds following one another with a new fund already
being set up before the old fund is completely exited. In this way, contrary to private VCs, it
is possible to invest capital from the new fund into portfolio companies of the old fund.
The preferred investment horizon within our sample varies between 5 and 10 years, with
public VCs being a little more flexible regarding a delayed exit.
The source of referral of an investment proposal does also play a part during the selection
process. It has been noticed that private VCs attach a slightly higher importance to a known
and trusted source of referral (like a well-known business partner, VC or entrepreneur) than
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public VCs. While private VCs do not always appreciate banks referring deals because of
their completely different mindset and goals, public VCs said that this is a common source of
referral, alongside accountants, consultants and public entities. Both types of VCs try to be in
close contact with universities and research centers and to participate in various events
(matching events, forums, etc.). Private VCs do so in order to actively search for good deals
and public VCs rather do so in order to increase awareness about their existence. University
funds most often receive deals from the technology transfer units of universities or actively
search for innovative R&D projects worth commercializing. This last approach becomes
more and more frequent as often, researchers and scientists simply do not think about the
commercial value of their innovation. Overall, although a known and trusted source of
referral may increase the interest in an investment proposal, it does not seem to have a
significant impact on selection criteria and their relative importance for neither type of VC.
As far as syndication is concerned, the majority of interviewees confirmed the importance of
syndication or fund matching for the selection of investment projects. Various reasons have
been given including the pooling of capital which allows for investments in larger projects,
the spreading of risks due to the ability to create a diversified portfolio with a limited amount
of capital available to each of the syndicating funds as well as sharing of knowledge and
expertise. In certain industries such as e.g. life sciences, where investment projects need a lot
of money, syndication is an absolute requirement. One interview partner said that four eyes
are better than two meaning that it is always better to have several VCs review and evaluate
an investment proposal to make sure it is worth investing money, time and effort. Several
interviewees emphasized the importance of syndicating a deal with local VCs in the case of
cross-border investments. In such cases, the local investors usually take the lead as they are
familiar with the legal framework and the culture of the country and with local industry
practices. Moreover, they are physically closer to the venture, which is essential for a proactive involvement and a good collaboration. Some public VCs stated that they would only
invest in a project (for X% of the total amount of capital needed) if fund matching by other
investors is warranted. Contrary to what prior authors (Leleux & Surlemont, 2003)
established, it appears that public VCs tend to invest in consortia for a majority of their
funded projects.
When public and private VCs syndicate investments, which absolutely happens in Belgium,
some contentious issues may arise. Often, these are related to the different types of fund in
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the consortium, open-end and closed-end, or the respective investment objectives, rather
economic and social or financial. For instance, compromises need to be made regarding the
expected exit horizon (private VCs usually want to exit a little sooner) or the valuation of the
venture (public VCs may be inclined to pay a higher price) and the return on investment.
When compromises need to be made, the lead investor (often but not always a private VC)
seems to have a little more power regarding its criteria and preferences. In any case, VCs
emphasized that even though they may consider the co-investors analysis and evaluation of
the venture proposal they always do their own thorough due diligence in order to estimate
whether a project is worth investing. Syndication thus does not fundamentally change
selection criteria and their relative importance but it requires a certain willingness to make
compromises.
As regards prior investment by BAs or VCs, a difference should be made between both
types of risk capital investors. Prior investment by BAs seems to not always be appreciated as
these investors often have a different investment philosophy. One VC said that BAs often
want short-term returns and only do one or maximum two investment rounds because of the
risk of being diluted by other investors in later rounds. He explained that they tend to invest
in projects they like (emotional decision making) and sometimes lack the necessary
professionalism. Unlike private and university-related VCs, who showed a similar critical
attitude toward BAs, public VCs were rather positive about the potential for cooperation with
prior investors (knowledge exchange, additional experience), whether BAs or VCs. Prior
investment by good, renowned VCs on the contrary was seen as a plus by all three types of
VCs, especially if they also participate in subsequent rounds. Such prior investors are then
usually contacted during the selection and evaluation phase in order to get their view on the
investment project.
Government subsidies were considered positive by all types of VCs as it is non-dilutive
money or capital for free as certain respondents put it. However, except for one university
fund who considered R&D subsidies as essential in the pre-seed phase, it was not considered
decisive for the investment decision by private and university-related VCs. Public VCs were
neutral regarding government subsidies. Some of the public VCs however stressed that under
the de minimis rule of the European Union, the maximum amount of capital provided by
public entities includes risk capital as well as subsidies.

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Public VCs are often said to have a lower incentive to select high-performing ventures
compared to private VCs given that their compensation usually consists of a fixed salary. No
management fee exists and no carried interest is paid as it is the case for private, independent
VCs. Our sample shows the following distribution across type of VC and type of management
compensation (Table 2).

Fixed compensation
Performance-based
compensation
TOTAL

Private VCs

University-related VCs

Public VCs

Table 2: Sample segmentation type of VC / type of management compensation matrix

It is obvious that private VCs use a performance-based compensation while public VCs and
university-related VCs, which show various characteristics of public VCs, pay their
employees a fixed salary. Several interviewed public and university-related VCs however
mentioned that they were considering to implement some sort of performance-based
compensation scheme in order to provide additional incentives to their investment managers.
For the public VCs in particular, this may prove difficult given the open-end nature of their
funds. While private VC investment managers will receive a performance-based
compensation after a fund has been exited (usually after 10 to 12 years) and the limited
partners have been paid, a public fund has no pre-defined lifetime and the funds capital is
recycled as soon as an investment is exited. This makes the time of the compensation
payment hard to determine. Overall, a certain performance-based compensation seems
interesting in order to create proper incentives for investment managers. Whether there is a
direct or indirect influence of the type of management compensation on selection criteria and
the scrutiny with which investment proposals are screened could not be determined with this
study design and has to be left to further research.

5.4

The impact of the crisis

The selection criteria used by all three types of VCs did not experience fundamental changes
because of the recent financial and economic crisis. Nevertheless, while private VCs noted
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that they may have gotten a little more strict in screening venture proposals, public VCs said
that they rather relaxed their criteria a little in order to get a chance to help more start-ups get
through these difficult times.
In accordance with EVCA (2011), the VCs in our sample confirmed a slightly delayed impact
of the crisis on the VC industry and its activities (fundraising, investment and divestment).
When it comes to fundraising, a clear impact for those VC funds with institutional or
individual investors among their shareholders could be observed. It got more difficult to raise
new capital from private investors especially from banks whose risk aversion increased
because of the crisis. Public money was easier to obtain, although government entities
probably lost a substantial part of their revenue from corporate income tax. This exactly
reflects the statements of Deloitte (2009).
As regards investments, a lot of portfolio companies were reported to have been forced to
change their business model and strategy because of the crisis. This often required additional
capital to be injected by VCs and the planning for the next few years to be revised. It also
sometimes proved difficult to find co-investors especially for risky, very early-stage
projects. Public VCs mainly mentioned that a lot of start-ups experienced severe liquidity
problems during the crisis. Therefore and because most banks would not intervene, public
VCs put in place special emergency programs and relaxed their investment criteria in order
to help those companies in need of working capital. One single public VC said that venture
proposals were screened with more scrutiny to make sure that only those high-quality projects
which are able to find second round funding are selected.
According to VCs, divestments have been affected by a tough exit environment with low
stock market prices, more risk-averse buyers and lower valuations.
One VC suggested that the crisis should also be seen as an opportunity. Especially bankaffiliated VCs stopped their activity due to the crisis which left and leaves many good
investment opportunities to the still active VCs.
Entrepreneurs, just as most other people, became a little more prudent with what they do.
Risk aversion increased and demand for venture capital may have decreased in certain areas.
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As regards other macro-economic events that had or still have an influence on the VC
activity, one VC explained that the raise of developing nations has a positive impact on exit
opportunities.

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6 Conclusion
Based on the empirical study with 15 VCs in Belgium, several differences in the selection
criteria that public and private VCs use during the screening and evaluation phase of their
investment process could be detected. Due to 3 university funds in our sample that did not
really fit in either of the two categories (public or private), a third category has been created
and university-related VCs have been analyzed separately.
In order to complement the research literature on VC investment criteria and to add some
valuable information to the general knowledge in this field, a few similarities and striking
differences in selection criteria, trade-offs and influencing factors between private, universityrelated and public VCs should be highlighted.
As some of the scientific literature suggests, the entrepreneur or management team
characteristics are extremely important to the investment decision of a VC. This study
particularly found criteria related to the entrepreneur or management team personality to be
key, such as honesty and integrity and a clear idea about the business concept. Sometimes,
uncertainties related to those personal characteristics make an evaluation difficult.
Entrepreneurs should therefore be well prepared, clearly communicate their project and
address potential issues and their solutions early on. In a nutshell, they should be clear and
transparent in order to reduce uncertainties and perceived risk as much as possible whatever
type of VC they contact.
A complete and balanced team was found to be of higher importance to public VCs. A single
entrepreneur (researcher or scientist) may therefore rather consider to contact a universityrelated or private VC. If only one or two positions still need to be filled in the management
team, an entrepreneur may also contact public VCs and discuss the issue with them.
All VCs emphasized the importance of a protected or protectable product which usually
involves a competitive advantage. This should be taken into account by entrepreneurs looking
for risk capital.

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Market size, growth and acceptance and even more so a competitive advantage were also
considered important by all types of VCs. No striking differences could be detected.
On the contrary, major differences regarding the expected rate of return or the multiple on an
investment were found which are much more important to private VCs than to the other two
types of VCs. Surprisingly, a clear path to exit was found least important to private VCs.
Entrepreneurs applying for finance at a private VCs should therefore make sure to highlight
and justify their ability to generate exceptional future returns. They can even attempt an
application if the path to exit is not yet hundred percent clear after, however, having discussed
this issue with the VC. When contacting a public VC, entrepreneurs should rather intend to
have their own stake in the venture as this is often required by public investors. For very
risky, very early-stage projects that have a link with a university or research center,
contacting a university fund may be the best choice as they appear least risk-averse.
VC- and fund-specific criteria, which are different for all three types of VCs, often constitute
knock-out criteria. Overall, a general advice to entrepreneurs is to get as much information as
possible on potential knock-out criteria of a VC before submitting a business plan. This saves
the time and effort of applying for funding at a VC that will reject the investment proposal on
first screening. For instance, entrepreneurs who apply to a VC that works with a closed-end
fund should make sure that there is a good chance to exit the investment before the end of the
fund. Otherwise, the submission of the business plan may not even be worth it. The same
holds for other VC- and fund-specific criteria such as geography, sector focus or maximum
investment size. Private and university-related VCs in our sample appeared a little more
flexible except for their sector and university (spin-off) focus, respectively. Public VC
agencies face much more restrictions (mainly from public authorities) regarding their
geographical and sector focus as well as certain other venture characteristics. In general, VCs
point to their requirements or knock-out criteria on their website. Nevertheless, some VCs
explicitly ask to still get in touch with them in case one or two requirements are not satisfied.
In some cases, a solution may be found.
This directly leads to another general recommendation, which is to establish a personal
contact with the VC firm before submitting a business plan cold. In this way, potential
knock-out criteria can be discussed right in the beginning. Otherwise, private VCs especially
may not even have a look at the business plan in busy times. This first contact preferably by
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phone conveys seriousness about ones investment proposal and establishes a good basis for
the development of further discussions. In addition, being referred by a known and trusted
source may help an entrepreneur to get the VCs eyes on his/her proposal again, especially
when contacting private VCs.
The reputation of other investors in the deal was also found to be very important. For
entrepreneurs, this means that the first investor in their project should ideally be a well-known
VC with a good reputation and track record, which facilitates getting additional investors on
board for syndication or for subsequent investment rounds.
In addition to financial characteristics, the most striking difference between public and private
VCs certainly regards the importance of economic and social motivations behind an
investment decision. While economic growth and employment creation are of high
importance to public VCs when making an investment decision, private VCs do not care
about such elements. They look for good investment opportunities that generate returns and
consider economic or social elements as a positive consequence of, rather than a reason for,
an investment. Generally speaking, even if public, private and university-related VCs may be
found to invest in similar projects based on similar criteria, they probably accept different
valuations for a venture depending on their respective objectives. Public and universityrelated VCs may be willing to pay a higher price (which of course affects the IRR or multiple
obtained at the exit) in order to achieve certain non-financially motivated objectives. Private
VCs however try to get the best (i.e. the lowest possible) price in order to obtain the highest
possible return at the exit. For them, the price is never fixed (externally determined) and
subject to negotiations. This should be kept in mind by entrepreneurs when deciding who to
approach with their project.
It seems that the trade-offs that VCs make between various selection criteria do not depend on
the type of VCs. At least, no major differences were detected with this study. In general,
trade-offs seem to be very specific to each single project.
Before contacting a VC firm, entrepreneurs should get information about the type of fund
they work with and make sure that in the case of a closed-end fund constraints regarding
the maturity of the fund and the remaining capital do not get in the way of an investment.
When approaching private VCs, entrepreneurs should try to avoid being referred by bankers.
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Getting in touch with a private VC through his personal network however may be helpful. In
addition, attending events and forums where investors meet entrepreneurs may be interesting
whatever type of VC an entrepreneur wants to get in touch with. Many of the interviewed
VCs said that they use such events to make themselves known and to actively search for good
investment opportunities. When approaching public VCs, entrepreneurs should already have
thought about potential opportunities for fund matching by private investors. This often is
required by public VCs. If an investment consortium is indeed composed of public and
private VC investors, potential conflicts between their respective interests, objectives and
investment criteria should be addressed as early as possible. Prior investment by BAs may be
seen as a negative point by private VCs. Entrepreneurs who had or still have BAs among their
investors, and who would like to approach a private VC for a next round of funding, should
sound out the VCs about their attitude toward BAs being on board. Prior investment by highquality VCs however is appreciated by all types of VCs. The same holds for government
subsidies, which entrepreneurs should always try to receive because they represent (nondilutive) capital that the VCs will not need to provide.
Finally, concerning the recent financial and economic crisis, a slightly delayed impact on all
VC activities (fundraising, investment and divestment) has been felt. Fundraising became
more difficult, especially for VCs with banks among their investors. Overall, while private
VCs seem to have become more strict when screening venture proposals for investment, some
public VCs relaxed their criteria or set up a crisis emergency program. For entrepreneurs,
this means that obtaining finance from public VCs may be easier during crisis times as their
specific programs aim at helping companies get through the crisis.

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7 Limitations and suggestions for further research


As with every research project, the overall design, including sample choice and data
collection method, as well as the analysis techniques chosen for this study have their
limitations. Although attempts were made to limit these shortcomings throughout the
conception and the execution of the study, a few of them should specifically be addressed.
Concerning the assessed investment criteria, an attempt was made to include a list of criteria
as relevant and complete as possible into the semi-structured questionnaire, with careful
attention also being paid to the wording and explanation of each criterion. However, by
including different or additional criteria or by using another wording, the obtained results
could have been different. In addition, although the attention of the reader has been directed
to the difference between espoused and in use selection criteria and between investment
criteria and success factors in the literature review section of this paper, no particular
consideration has been given to those differences within the empirical study due to the
limitations of the adopted methodology. Nevertheless, the existence of such differences
should be kept in mind when interpreting the results and recommendations. The same holds
for the overconfidence of VCs regarding their assessment of relevant selection criteria, which
could also not be addressed as such within the context of this empirical study.
Within this study, only five trade-offs between various selection criteria have been
considered, which all turned out to not depend on the type of VC. More trade-offs should be
included in a broader study, maybe those suggested by Muzyka et al. (1996), in order to get a
clearer view on how public and private VCs make trade-offs and what potential differences
exist.
Concerning the sample choice, only VC funds active in Belgium have been considered.
Although the sample may be to some extent representative for the Belgian VC industry, a
broad generalization of the results of this study for VCs in other countries should only be
attempted with care. The European venture capital market is not homogeneous (Manigart et
al., 1998) and even less so the worldwide venture capital market. Differences in the history,
structure and dynamics of the national VC industries, differences in the legal framework and
the national culture as well as a number of other factors may significantly decrease the
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practicability of such a generalization. As a consequence, the results of this study should not
be generalized to an international theory about differences in selection criteria between public
and private VCs. They should rather be considered as a signpost for researchers and
entrepreneurs and as a good starting point for additional studies in other countries.
As regards data collection, interviews as a survey method have been widely criticized by
previous researchers and authors in the field of venture capital investment criteria (Muzyka et
al., 1996; Zacharakis & Meyer, 1998; Mason & Stark, 2004). While interviews and
questionnaires have been predominantly used in the early research projects from the 1970s
and 1980s, newer studies tried to find and use better methods. Because of the many
limitations of interviews and their related analysis, other methods which proved useful in
previous studies, such as e.g. verbal protocol analysis (Hall & Hofer, 1993; Mason & Stark,
2004), conjoint analysis (Muzyka et al., 1996; Shepherd, 1999) or policy capturing, a realtime method often used in cognitive psychology (Zacharakis & Shepherd, 2001; Zacharakis
& Shepherd, 2005), have initially also been considered. However, due to budget and time
constraints as well as practical feasibility issues, we were not able to use these methods in our
study. In our opinion, self-report interviews backed by a semi-structured questionnaire were
justified as a mean of getting a first insight into differences between selection criteria used by
public and private VCs and giving recommendations to entrepreneurs. As to our knowledge
at least no prior studies really addressed this issue so far, our situation is similar to the one
of the earliest researchers in the field of VC investment criteria who tried to get a first insight
and who used interviews and questionnaires for this purpose.
The empirical study we did nevertheless shows all weaknesses and contains all biases of a
self-report study which calls upon the respondents introspection and insight into their own
decision making. There is a certain danger that VCs did give an answer according to what
they thought was expected by the interviewer or appropriate for their type of VC. It is also
possible as suggested by various authors such as Zacharakis and Meyer (1998) and
Shepherd (1999) that VCs have limited insight into their own decision making and that they
do not actually use the criteria in the ways that they think they do (MacMillan et al., 1985,
p. 122). Kollmann and Kuckertz (2010) highlight that VCs tend to over-stress criteria
irrelevant to day-to-day business, while under-stressing significant criteria concerning the
profitability and survivability of a given venture (p. 746) when directly asked in the context
of a retrospective self-report study using interviews or self-completed questionnaires. In
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general, potential uncertainties and overconfidence involved in the evaluation of new venture
investment proposals should be born in mind when interpreting the results of this study. An
additional issue may be the retrospective approach inherent in a self-report study about past
investment decisions. As noted by Mason and Stark (2004), the inability to exactly recall the
decision-making process and the criteria that have been used may have biased the VCs
answers in this study.
Having interviewed individual VCs on general decision-making practices and investment
criteria of their VC firm or fund may have introduced a subjective disturbing factor into the
study. Based on their past experience, each individual respondent made an educated guess
about the selection criteria used to evaluate investment proposals by their firm or fund.
Although they probably tried to make an objective educated guess, the subjective component
cannot be extracted from the obtained answers. If another individual from the same VC firm
or fund had been interviewed, some answers probably would have been different due to
subjective perceptions.
Another bias may be included in the results of this study. Working with a displayed list of
criteria that have all proved relevant in prior studies may have as a consequence that
interviewees consider all of them as important or very important. But in addition, not all
interviewees had the time to go through the questionnaire and especially the list of selection
criteria before the interview took place. It was noticed that unprepared interviewees who
discovered the proposed criteria for the first time during the interview had more difficulties
than their prepared peers to determine which criteria are relatively more important
compared to others. A stronger tendency toward rating criteria with important (4) or very
important (5) was observed for unprepared interview partners.
The analysis of the quantitative data, unfortunately, did not include any powerful statistical
tests due to the small sample size of 15 VCs. Various statistical tests compatible with a small
sample size, such as e.g. the Mann-Whitney U test, had initially been considered but finally
not been chosen for analysis. The additional information expected from the test results,
compared to what could already be observed from a simple and clear representation of the
descriptive statistics, was very limited. Therefore, the focus has been placed on descriptive
statistics in order to show similarities and differences in selection criteria between public and
private VCs (and university funds). Readers should keep in mind that using the mean to
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measure the central tendency for ordinal data is not perfectly legitimate, which however has
been done in order to highlight more subtle differences between the three types of VCs.
Finally, an interesting suggestion for further research should be made. As has been found by
Balboa, Mart and Zieling (2007), Alperovych (2011) and various other authors, companies
backed by private VCs seem to outperform companies backed by public VCs in terms of
performance and growth. Lerner (2004) stated that public venture capital programs are often
characterized by a considerable number of underachieving firms (p. 15). An interesting and
worthwhile initiative therefore consists in studying at a micro level, with on-the-ground
surveys the factors that could explain potential differences in behavior and performance of
public and private VCs (Leleux & Surlemont, 2003). Apparently, certain company attributes
considered as success factors (like an experienced management team, a clear product/market
concept and the willingness to obtain private funding) are not appropriately analyzed in the
selection process of such government programs. Public and private VCs as Leleux and
Surlemont (2003) say differ in their abilities to identify superior concepts (p. 99).
Given the operational inability of our paper to address this issue, future research should
investigate into more detail whether differences in performance could in fact be due to a
difference in the investment decision-making process and the selection criteria used to
evaluate investment proposals. For this purpose, the use of in-depth on-the-ground surveys is
recommended for interviewing public and private VCs just as has been done for this
empirical study. This qualitative information about investment decision making and selection
criteria should then be related to quantitative performance and growth data from the
companies backed by the surveyed VCs. Attention should be paid to the careful definition of
the concepts performance and growth. While a lot of prior studies focused on financial
performance, economic and social performance and value creation should also be taken into
account for the evaluation of the success of public and private VC investments.
In the context of such a study, the existence of a relationship between the type of VC
management compensation and the scrutiny with which investment proposals are screened
(based on selection criteria) should also be investigated. Lerner (2004) suggests that
government officials involved in the decision-making process of public VC agencies should
more closely scrutinize and evaluate investment proposals and this means going far beyond

96

a mere analysis of the submitted business plan. A performance-based incentive scheme


instead of the typical fixed salary compensation scheme could make them do so.
Last but not least, when studying the above-suggested issue, the following potential bias
should be taken into consideration. Instead of differences in performance resulting from less
than optimal selection of projects on the part of public VCs, may this outperformance of
private-VC backed companies not also be due to an initial selection bias? Leleux and
Surlemont (2003) indeed found no evidence for their crowding-out hypothesis, i.e. for
public VCs offering funding at marginal (below market) rates of return to entrepreneurs
(p. 99), whereby they would appropriate the best projects, leaving sub-optimal ones to be
financed by private venture capitalist (p. 99). The exact opposite could instead be the case. If
private VCs only accept the best projects, with a high potential for extraordinary rates of
return, they actually leave the sub-optimal deals to public VCs. Public VCs in turn may still
accept these sub-optimal deals because they have lower return expectations if they give the
priority to the economic and social policy objectives within their objective function. This
represents an initial selection bias insofar as public VCs already start their selection of
investment opportunities in a pool with projects that have lower expected growth and return
rates given that the most promising ones have already been presented to and accepted by
private VCs.

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Appendix
I

Semi-structured questionnaire

INTRODUCTION
My name is Danile Mllender and I am a last year Master student at HEC Management
School in Lige. I am currently writing my Master thesis entitled The selection criteria used
by venture capitalists to evaluate new venture investment proposals. A comparative study of
public and private players in Belgium..
After reviewing the existing scientific literature about the relevant topics, I would like to
include an empirical part into my thesis. For this purpose, I am conducting interviews with a
number of public and private venture capitalists (VCs) as well as some university funds in
Belgium. The main objective of this empirical part is to find out whether and what kind of
differences in selection criteria exist between public and private VCs in Belgium. In addition,
I would like to get some information about whether and to what extend the recent financial
and economic crisis had an impact on these selection criteria.

CONFIDENTIALITY
1

Do you agree with this interview being tape-recorded in order to facilitate my


analysis?

I only consider seed, start-up and early-growth4 investments in my study, so when answering
the questions, please focus on this part of your activity if you also invest in later-stage deals.
INVESTMENT OBJECTIVES
2

What are your companys main investment objectives? (own return, investor return,
promoting entrepreneurs and their projects or firms, social objectives [employment, etc.], economic
objectives [growth and regional development, attract new businesses and investors, industry
restructuring, etc.], environmental objectives, etc.)

seed: small amount of capital provided to prove a concept; start-up: financing of product development and
initial marketing, financing to launch the first product/service, to build distribution channels and to start selling;
early-growth: working capital to stabilize and develop market potential, the company may be producing and
selling but not making a profit yet.

107

LIST OF SELECTION CRITERIA


3

Please think about the investment projects(s) you most recently decided to invest in.
How important have the following criteria been for your investment decision? Please
rate the importance on a scale from 1 = unimportant, 2 = of little importance, 3 =
moderately important, 4 = important to 5 = very important. Please mention any other
criteria that may come to your mind. Please also name the 5 most important criteria
out of all criteria listed below.

Criteria

Relative importance
1

Entrepreneur / Management team personality


Endurance, capable of sustained effort
Evaluate and react well to risk
Passion, motivation, commitment
Vision
Preparedness (business plan)
Entrepreneur personality (chemistry, fit)
Honesty, integrity
Entrepreneur / Management team experience
Start-up experience
Leadership experience
Market familiarity, industry-related competence
Complete, balanced team (key positions filled)
Product or service characteristics
Proprietary technology
Product superiority (innovativeness, uniqueness)
Long-term need (product persistence)
Not easily imitated nor substituted
Market characteristics
Market size (reasonable) or niche
Market growth (significant)
Market acceptance, positive customer feedback
Market access (easy)
Ability to create post-entry barriers
Weak competition or competitive advantage
Financial characteristics
Entrepreneur / Management stake in firm
Required rate of return
Return > 10 x investment within 5-10 years
Path to exit (clear enough)

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Question 4
(
or )

Degree of riskiness
Investment rounds until exiting
VC-specific criteria
Alignment with geographical focus
Alignment with sector focus
Investment stage / Investment round
Investment size
Number and type of companies already in portfolio
Reputation of other investors
Number of employees in venture firm
Spin-off (company or university)
Contribution to policy objectives
Employment creation
Economic development and growth
Development of a specific region
Development of a specific industry
Foster innovation
Environmental objectives (green technologies,)
Attract other investors (to the region / investment)

Others
Your gut feeling, intuition

TRADE-OFFS
The next section will ask you to make trade-offs between different categories or pairs of
selection criteria or to assess to what extent a weakness in one area can be overcome with a
strength in another.
6

Would a good investment opportunity get a chance even if it does not fit your
investment strategy (geography, sector, stage, round, size)?

Would you consider a project with a certain weakness in the management team if the
business concept is otherwise sound uniqueness of product, market growth, strategic
position (competition, ability to establish entry barriers), good expected returns, etc.?
Would you bet on the jockey (entrepreneur) or the horse (business concept)?
Under which circumstances? (proactive style, provide managers yourself)

Could prior leadership experience of the entrepreneur / management team be a


substitute for prior start-up experience?

109

Could the entrepreneurs / management teams leadership skills or market/industry


knowledge make up for high competition in the industry (which makes a project
riskier)? (the entrepreneur / management team will tackle potential problems, be proactive)

10 Do you focus more on an entrepreneurs passion for his or her project or on an


entrepreneurs preparedness with regard to the business plan?

INFLUENCING FACTORS (factors that may impact the selection criteria and their relative importance)
4

When considering the whole decision making process (from the initial screening and
selection phase to the most detailed analysis and evaluation of a venture proposal), would you say
that the importance of any criterion changes when moving through the decision
making process? I.e., are some criteria more important for initially separating the
wheat from the chaff and some others more relevant for thoroughly checking the
viability and potential for success of an interesting proposal.

After the first investment round, is there another thorough screening and a revaluation
of the investment project before investing in subsequent rounds? How do criteria
change between first and subsequent round investment decisions? In percentage terms,
how much do you invest in first rounds and how much in subsequent rounds?

Do you work with open-end or closed-end funds?


If you work with closed-end funds, does the relative importance you attach to the
selection criteria listed in question 3 changes over the lifetime of a fund based on the
following constraints:
available fund capital
timing of an investment proposals arrival relative to the maturity of the fund
composition of the portfolio at the time of the proposal (development stages of
companies, geographic concentration)?
If you work with open-end funds, are there any similar or other constraints influencing
the relative importance of selection criteria?

11 Which role does the source of referral (cold receipts, referred deals, own search) play
for selection criteria?
12 How important is syndication / fund matching from private investors for your
investment decision? Does the relative importance of selection criteria changes
depending on whether you are the lead investor5 or a co-investor? How do you make
compromises?

lead investor: the one who structures the deal and oversees the investment (negotiations, legal work, preparing
term sheet and shareholder agreement, etc.)

110

13 How important is prior investment by business angels or other public or private VCs?
What influence does this have on the relative importance of selection criteria?
14 What role does subsidization by government initiatives play?

IMPACT OF THE CRISIS


15 Are there any remarkable differences in selection criteria or their relative importance
when considering the investment decision-making process of your company /
institution before, during and after the recent financial and economic crisis?
Are there any other macro-economic events (globalization, ICT, the rise of developing
nations, etc.) influencing the investment decision and the weighing of criteria?

DEMOGRAPHICS
Finally, I would like to ask you some general questions about you as a venture capitalist /
fund manager and your company / institution.
Field of study:
Years of experience in business:
Years of experience in VC industry:
Years of experience with current VC firm / institution:
Age of VC firm / institution / fund (years since founding):
Type(s) of intervention (equity participation, debt-based instruments, convertible debt, etc.):
Preferred investment horizon (exit within X years):
Preferred exit (buy back, IPO, trade sale, etc.):
Do you work with an exit clause in the shareholders agreement?
Expected average rate of return on investment:
Percentage of investments (funded ventures) that are successful (when was the investment
decision right and when did selection criteria actually work and led to success):
Type of compensation for the VC management team:

Thank you for your participation! I will gladly provide you with the results of my study in
case you are interested in a feedback.
111

II Relative importance of selection criteria median

Figure 7:: Relative importance of selection criteria median


(1 = unimportant to 5 = very important)

112

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