When Entrepreneurs Choose VCs Experience, Choice Criteria and Introspection Accuracy

Venture Capital,
Vol. 9, No. 4, 285 – 309, October 2007
When Entrepreneurs Choose VCs:

Experience, Choice Criteria and
Introspection Accuracy
DAVE VALLIERE* & REIN PETERSON**
*Ryerson University, Toronto, Canada, **York University, Toronto, Canada
(Accepted 4 May 2007)
ABSTRACT This study examines the criteria by which entrepreneurs choose their venture capital
investors, using data from 59 entrepreneurs evaluating the relative importance of seven selection
criteria. We divided our sample into three approximately equal subsamples, according to the
degree of previous venture capital experience of the entrepreneur. These data suggests that novice
entrepreneurs value the seven criteria differently from more experienced entrepreneurs, and in
practice value these criteria differently from what they espouse. All groups of entrepreneurs
consider valuation to be the primary criterion, and also view the terms and conditions of the
investment deal as important. But as entrepreneurs gain experience they increasingly value the
personal compatibility of the VC as important in their selection. Other differences between
inexperienced and experienced entrepreneurs are reported for secondary selection criteria. These
results recommend caution in the use of espoused data for future empirical research in this area,
and suggest practical negotiating strategies for participants in this market.
KEY WORDS: Venture capitalist choice, entrepreneurs, experience, espoused behaviour,

conjoint analysis
Introduction
The effective matching of venture capital resources to entrepreneurial opportunities
is an important function of the early-stage capital market. The strategies and
processes adopted by both types of market participants (venture capitalists and
entrepreneurs) are key determinants of this market performance. But, compared to
the literature on the selection criteria used by venture capitalists to evaluate
entrepreneurial ventures, the literature on the criteria used by entrepreneurs to select
venture capitalists is quite limited. There appears to have been but a single study to
date that explicitly made an empirical examination of the criteria used by some
entrepreneurs to select their source of venture capital (Smith, 1999). Smith asked 143
entrepreneurs who obtained venture capital (VC) funding in 1997 or early 1998 to
Correspondence Address: Dave Valliere, School of Business Management, Ryerson University, Toronto,
Ontario M5B 2K3, Canada. Email: valliere@ryerson.ca
ISSN 1369-1066 Print/1464-5343 Online/07/040285-25 Ó 2007 Taylor & Francis

DOI: 10.1080/13691060701605413
286 D. Valliere & R. Peterson
rate the importance of 29 potential venture capitalists’ selection criteria. The results
showed that entrepreneurs invest significant effort in this process, devoting 100 hours
or more, involving many different information sources, and involving other members
of their teams. The study also found variations in criteria importance that varied
with types of entrepreneurs, including the age and business experience of the
entrepreneur. We have used the Smith (1999) study to launch our own in-depth
investigation of the importance of experience of the entrepreneur in choosing a VC
investor, and extended Smith’s work in two ways. First, by examining the effects that
entrepreneurial experience has on these choices, we embed our research in previous
theoretical frameworks and for the effects of entrepreneurial experience, as originally
developed by Reuber and Fischer (1999) and extended by Westhead et al. (2005), by
specifically focusing upon the role of entrepreneurial VC experience. This prior
research found that differences in the decisions and actions taken by entrepreneurs
were related to differences in information search and opportunity recognition
reported by novice and experienced (serial and portfolio) entrepreneurs. By similarly
incorporating the role of experience into the VC selection processes of entrepreneurs,
we show the generalizability of the theory to the domain of entrepreneurial finance,
and provide a theoretical basis for the experience effects that Smith (1999) observed.
Secondly, by employing an alternative empirical measurement approach, we
highlight the potential error inherent in simple espoused measures of choice criteria,
which social judgement theorists have suggested may be inaccurate (Priem and
Harrison, 1994). Triangulation of our resulting conjoint simulation data and
espoused choice data shows that, in practice, venture capital fundraising experience
and general business experience change the way that entrepreneurs think and talk
about choosing their venture capitalists, and have specific effect on the actual choice
behaviours of entrepreneurs. This suggests that, as they gain experience with VC
financing, entrepreneurs learn to adjust their actual criteria, and to more accurately
introspect into their own decision processes or to develop sufficient confidence to
espouse their true criteria with less influence from social desirability biases.
The Research Questions

It is our goal to contribute to the knowledge of the selection behaviours used by
entrepreneurs to choose between VCs. In particular, the current study was developed
to use VC term sheets as a unit of analysis to examine four central questions:
(1) How do entrepreneurs rank the importance of different selection criteria when
actually evaluating VC financing offers?
(2) Does previous VC financing experience influence the relative importance of
these criteria?
(3) Do entrepreneurs accurately espouse criteria that correspond to their actual
choice behaviours?
(4) Does previous VC financing experience influence the accuracy with which
entrepreneurs report their choice behaviours?
These questions are framed to allow for entrepreneurs with different levels of
experience, who may place different degrees of importance on the various selection
When Entrepreneurs Choose VCs 287
criteria according their experience with VCs. In this, we follow Smith (1999), Reuber
and Fischer (1999) and Westhead et al. (2005).
Literature Review
Knowledgeable practitioners, such as venture capitalists, seem to believe that
entrepreneurs’ experience is important to understanding their behaviours
(MacMillan et al., 1985; Goslin and Barge, 1986; Riquelme and Rickards, 1992).
Reuber and Fischer (1999) recommend that researchers take into account both the
ongoing stream of new venture experience and the prior stock of the founder/
entrepreneur’s experience, and the interrelationships between the two, when using
experience as a research variable. Only by focusing on how venture capitalists and
entrepreneurs react to a stream of experiences can we really understand the role of
experience in influencing decisions and action outcomes.
It has been found that founders’ stock of experience has a better predictive ability
of performance at start-up, than for subsequent outcomes (Reuber and Fischer,
1999). Therefore we have focused on the stock of an entrepreneur’s experience both
in start-ups and in serial ventures, by identifying the stock of experience as the
number of times an entrepreneur has sought venture capital.
Reuber and Fischer also provide evidence that expertise mediates the relationship
between founder experience and venture performance. Experience is also thought to
impact on venture performance through the development of a ‘dominant logic’ or an
‘information funnel’ that determines the most significant past influences on actual
decisions and actions (Prahalad and Bettis, 1986; Bettis and Prahalad, 1995). The
cognitive processes involved in the firm’s dominant logic have been found to be those
of the dominant individual, the entrepreneur/founder (Mintzberg, 1988; Chandler
and Hanks, 1994; Peteraf and Shanley, 1997).
Reuber and Fischer’s (1999) insightful literature review did not detect a consistent
direction of association between founder experience and venture success. They did
not make an explicit distinction between prior independent business ownership
experience and other types of experience related to entrepreneurship (for example,
opportunity identification, managerial and technical capabilities, and negotiations
with venture capitalists). In addition, they did not make a distinction between types
of entrepreneurs. Westhead et al. subsequently extended the model by explicitly
examining entrepreneurial experience effects, particularly prior experience
with business ownership (Westhead et al., 2005). This extended model is shown in
Figure 1.
A novel contribution of the Westhead et al. study is the consideration that the
streams of experience accumulated by novice entrepreneurs are not the same as those
reported by more experienced serial and portfolio entrepreneurs. This study also
highlighted the fact that serial and portfolio entrepreneurs with prior independent
business ownership experience cannot be assumed to be a homogeneous group. They
found that the novice entrepreneurs used significantly fewer sources of information
than experienced serial and portfolio entrepreneurs. A larger proportion of serial
and portfolio entrepreneurs had used information from personal friends, bankers,
venture capitalists or business angels than novice entrepreneurs. This evidence
suggests that, in the domain of entrepreneurial finance, experienced entrepreneurs
Figure 1. Effect of experience on behaviours (adapted from Reuber and Fischer (1999) and
Westhead et al. (2005))
are more likely to leverage their previous experience to select between VC term
sheets. Both novice and experienced entrepreneurs reported that their challenge ‘is
not to identify the idea, but to obtain capital and other resources’ (Westhead et al.,
2005). For the present study, we have therefore operationalized experience as the
number of times that an entrepreneur has sought capital from VCs.
The model of Figure 1 highlights the importance of both expertise and dominant
logic cognitions in mediating the impact of experience on choice behaviours. This
suggests that cognitive biases may also play a role, and may act to bias the findings
based on self-reports, such as Smith (1999); experience plays a role in the accuracy of
these self-reported data. Chandler and Hanks (1994), Mintzberg (1988) and Peteraf
and Shanley (1997) all concluded that experienced entrepreneurs were more likely to
express their actual dimensions of entrepreneurial behaviour. This suggests that the
espoused criteria of experienced entrepreneurs are more likely to reflect their actual
behaviour than is the case for novice entrepreneurs.
The literature also postulates that a concept of entrepreneurial alertness involves a
distinctive set of perceptual and cognitive processing skills that direct the
opportunity identification process, and that entrepreneurial alertness can be viewed
as a continuum (Gaglio and Katz, 2001). As a result of their experience, some
entrepreneurs can therefore be viewed to be associated with higher levels of alertness,
while inexperienced novice entrepreneurs are associated with lower levels of
alertness.
A third cognitive perspective, based on neoclassical economic theory, takes a
‘conscious search perspective’, with information search regarded as a mechanism to
optimize performance (Caplan, 1999). Entrepreneurs are assumed to know a priori
where they can accurately weigh the costs and benefits of acquiring new information
(Fiet et al., 2000). Less experienced novice entrepreneurs may conduct search
routines that are narrower in terms of the amount of information collected. This is
because they may be less attuned to the variety and implications of signals from the
environment. Conversely, experienced entrepreneurs, drawing upon their prior
business ownership experience, will attend to more signals because they have a better
appreciation of the value of information being sought (Cooper et al., 1995).
Contrary to expectation, Cooper et al. (1995) found that novice entrepreneurs
sought more information than experienced entrepreneurs. They attributed this
finding to the overconfidence of habitual entrepreneurs. This evidence is in line with
Kirzner’s ‘environmental alertness perspective’ (Kirzner, 1973, 1997). Westhead
et al. (2005) suggest that experienced entrepreneurs may have higher levels of
alertness, and therefore they may not need to search for vast amounts of information
to identify an opportunity. They further suggest that experienced entrepreneurs,
drawing upon their specific human capital relating to prior experience, will have
accumulated skills and expertise that enable them to better discover additional
business opportunities.
Research into the search operations within the market between entrepreneurs and
VCs has been primarily focused on how VCs screen and select the entrepreneurial
firms they wish to invest in. This research has included a diverse range of studies that
have helped to develop a robust set of criteria used by VCs to select their
entrepreneurs (Bruno and Tyebjee, 1983; Rea, 1989; Cable and Shane, 1997;
Zacharakis, 2002; Hsu, 2004).
In contrast to this well-developed research stream, comparatively little is known
about how entrepreneurs select their financial sources. This is unfortunate, as
entrepreneurs often do have choices. In particular, the most desirable entrepreneurs
with the most attractive projects often have choices from among competing capital
suppliers; Smith found that over 70% of entrepreneurs seeking VC financing believe
they have competitive bids to consider, and over 50% believe they have three or
more competitive offers (Smith, 1999). Indeed entrepreneurs seek to bring about this
situation by attempting to establish a market, once they receive their initial financing
offer, by seeking out additional competitive bids. Even if they are unsuccessful in
creating this market, or are precluded from doing so by contractual terms with the
first VC, they can still apprehend a freedom to choose. If they reject the first ‘take it
or leave it’ term sheet from a VC, they expect to be able subsequently to solicit a
competing term sheet from another VC.
Subsequent research attempted a theoretically based normative recommendation
for appropriate criteria by which entrepreneurs may select a variety of different types
of capital provider (Leshchinskii, 2003). This research further argued that the
screening abilities of active investors (such as VC investors) adds value to the
entrepreneurial firm by resolving uncertainties, a result later confirmed by studies
that suggest that in an efficient market such investors are rewarded for this value
creation (Ippolito and Bertoni, 2004; Valliere, 2007).
The value of this differential screening ability has been shown to act as a signal of
VC investor quality, which may attract the more desirable entrepreneurs, since high
quality entrepreneurs will seek out high quality VC investors (Kelly and Hay, 2000;
Berkovitch and Serban-Levy, 2004; Valliere, 2005). For example, one study
concluded that entrepreneurs will pay a 10 – 15% price premium (in the form of
reduced valuation) in order to be affiliated with VC investors of high reputational
quality (Hsu, 2004).
Collectively, these studies provide the basis for a rich set of potential selection
criteria for further examination. This set can be somewhat simplified by aligning
related definitions and concepts under a single construct. Examples of constructs

having a multiplicity of operational measures in the existing literature include the
services provided by a VC, the structure of a proposed investment deal, and the
reputation of a VC.
We know from consumer behaviour research that, when a decision is important,
consumers (in our case, entrepreneurs who seek venture capital deals) put
considerable effort into weighing alternatives before coming to their decision
(Hansen, 1976). Consumers consider sets of attributes by using two different types of
decision rules, compensatory and non-compensatory.
In compensatory models, consumers compare the positives and negatives for
each product on all relevant attributes. The key feature of these models is that a
very high rating on one attribute can compensate for a very low rating on
another attribute. In non-compensatory models consumers eliminate all options
that do not meet some basic standard. In others words, a product with a very
low standing on one attribute cannot make up for this position by being very
good on another attribute. These two types of decision rules require decision
makers to conduct a trade-off between optimal decisions (with large information
requirements and complex information processing demands) and efficient
decisions (with simple decision requirements, but potentially suboptimal
outcomes).
Consumers with high motivation (such as those facing infrequent but high
involvement purchase decisions) consider more alternatives and attributes, and tend
towards compensatory decision rules. Consumers with less motivation are more
likely to use non-compensatory decision rules. When decision makers have more
brand-based knowledge (in our case, experience), they tend to use compensatory
decision rules for judging desirability. Experts tend to use price (in our case,
valuation) less in judging quality; this is particularly the case when there are other
cues, such as a known brand (in our case experience in dealing with particular
venture capitalists).
When there are many attributes to choose from, decision makers tend to adopt a
combined strategy – narrow the field with non-compensatory rules and then make
the final choice with compensatory rules (Johnson and Meyer, 1984). In sufficiently
complex choices, some criteria may be non-compensatory (e.g. price/valuation) and
act as an initial screen. Then the other compensatory criteria are applied to refine the
final choice.
Hypotheses
The literature review motivated us to seek to test three hypotheses, as suggested by
prior researchers (Chandler and Hanks, 1994; Mintzberg, 1988; Peteraf and Shanley,
1997; Johnson and Meyer, 1984; Reuber and Fischer, 1999); we will test the
following three hypotheses about the dominant logic and rules used by entrepreneurs
evaluating offers of venture capital.
Hypothesis 1: Entrepreneurs use dominant logic cognition (i.e. both non-

compensatory and compensatory rules) to choose between term sheets presented
by VCs.
The importance of prior experience as suggested by Westhead et al. (2005) and

Reuber and Fischer (1999) will be used to examine the difference between
entrepreneurs with relatively little and considerable experience with VC term sheets,
leading to our second hypothesis.
Hypothesis 2: The relative importance of choice criteria will change as entrepre-

neurs gain experience with VC term sheets.
Finally, the somewhat contradictory and unclear findings by Westhead et al.

(2005), Gaglio and Katz (2001) and Cooper et al. (1995) motivated our third
hypothesis.
Hypothesis 3: The consistency of ranking the choice criteria at introspection stage

and at decision stage will improve as entrepreneurs gain experience with VC term
sheets.
Empirical Study
In the summer and autumn of 2005, we conducted an empirical study of the decision
criteria used by entrepreneurs when selecting from among competing sources of
venture capital. This quantitative study was aimed at discovering the importance of
various criteria in making this decision, and at comparing espoused and in-use
importances (as determined through simulation).
Methodology
The modest extant research that examines the selection criteria used by
entrepreneurs has assessed espoused importances only, a significant limitation. In-
use criteria may turn out to be quite different from those espoused by the
entrepreneurs. For example, research into the decision processes of VCs has found
that they are poor at introspection into their decision practices, and that their in-use
criteria are different from the criteria they espouse (Shepherd, 1999a). Such may also
be the case with entrepreneurs, as entrepreneurs have been found to have high levels
of overconfidence with regard to new ventures they found, particularly if possessed
of voluminous data (Forbes, 2005). Entrepreneurs engaged in marketing their firms
and their detailed business plans to VCs may therefore be overconfident in their
ability to introspect and determine their actual selection criteria (Zacharakis, 1997;
Zacharakis and Shepherd, 2001; Zacharakis, 2002; Forbes, 2005).
Previous attempts to address the question of how entrepreneurs choose their
sources of VC financing have either asked them directly, as with the Smith study, or
have indirectly inferred criteria from studies of the criteria used by VCs (Bruno and
Tyebjee, 1983; Smith, 1999). Both of these approaches are somewhat unsatisfactory,
in that the results have low discrimination (entrepreneurs may appear to have very
many criteria, all of which are equally important to the decision process), or the
espoused importance might not match actual practice (entrepreneurs may say a
particular criterion is important, but the criterion has low correlation with actual
choices made), or the results ignore interaction effects and other trade-offs that occur
with real-world attribute bundles (such as when the importance of criterion A

depends on whether criterion B is below a particular threshold value). What is
needed is a technique that identifies actual ‘in-use’ criteria, measures their respective
importance, and accounts for their simultaneous effects on real-world choices. This is
the goal of conjoint analysis.
Conjoint analysis is a research technique developed to identify and quantify the
importance of criteria used in making multidimensional judgements, such as when
consumers select and purchase a product that has several desirable attributes. It
differs from other marketing research techniques in that it attempts to capture actual
attribute importances through simulated choice scenarios, and it captures preference
information about several attributes simultaneously (potentially allowing for the
identification of interaction effects). It works by presenting subjects with combina-
tions of attributes that realistically mimic the kinds of products offered in the real-
world marketplace. Subjects are then asked to evaluate these combinations, either by
ranking them individually or by making choices among them. From this evaluation
information, preferences and relative utilities of the various attributes can be
deduced (Luce and Tukey, 1964; Green and Rao, 1971; Curry, 1996). This method
has a long history of usage in the marketing literature and has been successfully
applied in domains other than marketing (Bonner, 1990; Hitt and Tyler, 1991; Priem
and Harrison, 1994; Davis, 1996), but it is still a relatively new methodological
approach for research into entrepreneurship. On a limited basis, this methodology
has been applied to the study of decision making by venture capital investors, to
improve the validity of prior research into the relative importance of various
investment criteria (Riquelme and Rickards, 1992; Muzyka et al., 1996; Shepherd,
1999b, c; Shepherd et al., 2003).
Our selected unit of analysis was an individual entrepreneur responsible for
obtaining VC financing for a firm. Since the research includes examining differences
in how entrepreneurs choose versus how they espouse they make their choices, it did
not matter whether the entrepreneurs ultimately completed a financing with the
suppliers, only that they had sought venture capital and had faced a choice of
supplier to proceed with or to reject. The sample frame was simply that they
apprehended a choice of financing sources from more than one competitive supplier
(i.e. they would potentially have to walk away from somebody’s money).
Entrepreneurs from Canada, the USA and the UK were included in the sample
frame. Potential participants were identified by referral from professional VC firms
(such as members of the Canadian Venture Capital Association, National Venture
Capital Association and British Venture Capital Association) and entrepreneurial
associations (such as Entrepreneurs’ Organization, United States Association for
Small Business and Entrepreneurship, and Young Presidents Organization). The
potential participants were contacted by email and invited to participate in the
research by completing the interactive survey on a website.
Based on previous research and the results of these validation exercises, the
following seven selection criteria were included:
(1) Valuation. Valuation of the entrepreneur’s company to determine how much

equity the entrepreneur would have to give to the VC in return for the
investment. This is manifest either as the absolute pre-money value placed on
the entrepreneur’s firm, or as the amount of equity demanded by the VC (Bruno

and Tyebjee, 1983; Smith, 1999).
(2) Terms and conditions. The covenants the entrepreneur must accept that frame
the entrepreneur’s freedom of action. These may be operational constraints
(Bruno and Tyebjee, 1983), financial constraints (Brennan and Kraus, 1987;
Rea, 1989; Hellmann and Stiglitz, 2000) or the form of exit required by the VC
(Smith, 1999).
(3) Value-added services. Support that the VC offers to the entrepreneur as
supplementary expertise that may be lacking in the entrepreneur’s firm. These
include access to corporate partners (Rea, 1989) and other networks (Hsu,
2004), and the provision of sounding boards and other managerial support
services (Bruno and Tyebjee, 1983; Smith, 1999).
(4) Reputation. Reputation of the VC in growing successful ventures, having deep
pockets and providing honest dealing. This reputation can comprise ethical and
non-opportunistic behaviour on the part of the VC (Bruno and Tyebjee, 1983;
Cable and Shane, 1997; Zacharakis, 2002) and having a good reputation for
making additional follow-on investments (Smith, 1999).
(5) Skill and independence. Whether the VC is skilled and confident enough to
invest in early-stage companies or in firms that have been rejected by other VCs,
thereby indicating that the potential success of the entrepreneur’s firm will be
accurately recognized. This skill can include competence in service delivery,
willingness to tolerate uncertainties of early-stage investment (such as
incomplete management teams) and deep knowledge of the industry and
lifecycle stage (Bruno and Tyebjee, 1983; Smith, 1999).
(6) Personal compatibility. Whether there is likely to be a constructive working
relationship between the entrepreneur and the VC (Smith, 1999; Zacharakis,
2002). Potentially a moderator of other criteria, since much of the non-financial
value of the VC participation is discretionary and dependent on cooperation
between VC and entrepreneur.
(7) Ease of deal making. Transaction costs involved for the entrepreneur, including
financial costs, and effort and time required to make the deal. Speed with which
the VC makes decisions and the effort that the entrepreneur needs to make to
convince the VC to invest (Bruno and Tyebjee, 1983).
Participants were asked to rate the relative importance of each criterion

independently on a seven-point scale (1 ¼ not at all important, 7 ¼ very important).
Respondents were then presented with a conjoint exercise that required them to
evaluate bundles of criteria (attribute and level pairs that simulated potential
financing offers) in the context of making a choice of a venture capital provider in a
competitive situation. Each bundle contained the seven proposed selection criteria at
different levels. Valuation occurred at three levels (33% higher than other VCs, same
as other VCs, 33% lower than other VCs) and each of the other attributes occurred
at two possible levels. The respondents were asked to imagine they were seeking
venture capital for their firms, and to consider each bundle as a potential VC
financing offer. They were asked to individually rate their likelihood of accepting
each of these bundles on a seven-point scale (1 ¼ not at all likely, 7 ¼ very likely).
This task was intended to simulate the choice of whether to accept similarly offered
VC investment deals in the real world. Table 1 describes the combinations of

attributes and levels that were included in the bundles presented to respondents.
The orthogonal design of the conjoint bundles was achieved using Bretton-Clark
Conjoint Designer software (version 3). From this, 12 bundles were defined as an
orthogonal design set. One bundle, having the greatest number of attributes at the
desirable level, was manually replaced with an optimum bundle having all seven
attributes at the desirable level. This provided a validity-check mechanism, in that
such a bundle should have the highest likelihood ratings for all participants. After
making this substitution, the orthogonality of the conjoint was reconfirmed by
inspection of the correlation matrix. No significant off-diagonal correlations were
introduced by the substitution, indicating sufficient orthogonality in the design.
The conjoint design of 12 bundles, each displaying seven attributes, was within the
range that may be effectively evaluated by respondents examining full-profile
bundles, rather than selective or adaptive bundles (where only a subset of criteria are
shown in any given bundle) (Curry, 1996; Chrzan and Orme, 2000; Orme, 2003). It
also mitigates the risk of any attribute additivity threat to validity, in which a large
number of attributes with relatively minor importance can overwhelm the deduced
importance of a smaller number of extremely important attributes.
To help to reduce the risk of common rater consistency bias in these responses
(where responses to the espoused-criteria questions may tend to act as anchors
during the in-use conjoint simulations), a set of unrelated questions were interposed
between these two sections of the survey (Podsakoff and Organ, 1986; Podsakoff
et al., 2003). These questions included estimates of items of general knowledge
related to financing. These novel questions additionally served to reduce respondent
fatigue and to thereby improve response rates (Yu and Cooper, 1983; Podsakoff
et al., 2003). Conjoint scenarios were also presented in random order to each
participant to help mitigate potential common rater effects and item characteristic
effects.
To replicate the ‘take it or leave it’ staged nature of competition among VC
investors the respondents were asked to rate each proposed financing bundle
individually and serially. Smith’s (1999) observation notwithstanding, they were not
asked to make choices from among competing simultaneous offers.
Respondents were asked several demographic variables for their firms and their
experience in raising venture capital financing: the lifecycle stage of the firm, sales
and sales growth rate, number of completed VC rounds, total funds obtained, size of
the most recent VC round, and whether they had ever been unsuccessful in obtaining
venture capital. Respondents were also asked some personal demographic variables:
their age and sex, amount of business experience, self-assessed level of knowledge
about VC financing, and the country and industry in which they have the most
experience in raising VC financing.
Results and Analysis

Two-hundred and seventy entrepreneurs were invited to participate in the research.
Seventy-seven survey responses were obtained through the website. Of the total
responses, 18 were eliminated for being materially incomplete or incorrectly
completed, leaving 59 valid responses and a final response rate of 22%. Of these
Table 1. Conjoint bundles
Attribute Low level High level

Valuation – what value the VC is 33% lower than 33% higher
placing on your company, to other VCs than other VCs
determine what portion of
equity shares they would want
in exchange for their money.
Restrictiveness of terms and Very restrictive Very open
conditions – how many other
restrictions or limitations the
VC would place on the
company and its future
financing rounds.
Value-added services – the Few Many
advice, management services,
network contacts and other
helpful services the VC can
provide to you.
Reputation – how respected the Poor Excellent
VC fund is by outsiders.
Skill and independence – as Very low Very high
demonstrated by sometimes
investing in firms that are
early-stage, or that have been
rejected by other VCs.
Overall personal compatibility – Poor compatibility Highly compatible
whether the individual VC is
compatible with you in a
productive working
relationship.
Ease of deal making – how Very difficult Easy
quickly the VC makes
decisions, and the effort that
would be required from you to
complete the deal.
Note: Question text reads: ‘How likely would you be to accept this offer?’ Answer is scored on
seven-point scale where 1 ¼ not at all likely and 7 ¼ very likely.
responses, six were partially incomplete but usable for some analyses.
Respondents included entrepreneurs from a range of industries, firm sizes, growth
rates and firm age. Table 2 summarizes the firm characteristics of the sample. The
entrepreneurs also exhibited a range of personal backgrounds and familiarity with
VC financing. Table 3 summarizes these characteristics of the respondent
entrepreneurs.
With respect to espoused importances of the seven criteria tested, we found only
modest levels of discrimination among the criteria. Entrepreneurs rate Personal
compatibility higher than other criteria (6.24 vs. 5.44 mean rating on a seven-point
Likert scale), and are more uniform in this rating (S.D. 0.95 vs. 1.41). They rate
Table 2. Summary of firm characteristics (n ¼ 53)
Lifecycle stage
Seed 34.0%
Launch 35.8%
Rapid growth 26.4%
Expansion 3.8%
Sales revenues
Less than $1M 62.3%
$1 – 10M 30.2%
More than $10M 7.5%
Sales growth rate
Less than 20% CAGR 35.8%
20 – 100% CAGR 37.7%
More than 100% CAGR 26.4%
Value-added services lower than other criteria (4.88 mean rating), but are less
uniform in this rating (S.D. 1.68).
Data obtained from the conjoint simulations were analysed using Bretton-Clark
Conjoint Analyzer software (version 3). Comparing these results to the espoused
results yields some interesting overall findings. Table 4 shows the comparison
between normalized importance values by the two research methods. These
values indicate the relative weighting that entrepreneurs gave to each criterion,
when presented with a proposed financing bundle. These results show a
marked increase in importance given to Valuation and Personal compatibility,
and relatively little importance given to Skill and independence and Value-added
services, when compared to what entrepreneurs espouse to be important.
The 53 respondents were then divided into three subgroups according to their level
of experience. A scale based on the age of the entrepreneur, years of business
experience, number of rounds of venture capital completed, total amount of venture
capital previously raised and self-assessed expertise with venture capital (Cronbach’s
alpha ¼ 0.80) was used to form these three subgroups:
(1) Novice entrepreneurs – This group was younger, less experienced in business in
general and with venture capital in particular (n ¼ 18).
(2) Average entrepreneurs – This group was average in terms of age, business
experience and venture capital experience (n ¼ 18).
(3) Experienced entrepreneurs – This group was older, had more business
experience and had more venture capital financing experience (n ¼ 17).
The data were also separately formed into subgroups according to selected
demographic variables. Where subgroups featured 15 or more members, separate
conjoint importance values were calculated and compared to the entire sample of
entrepreneurs (n ¼ 53). Table 5 summarizes the conjoint importance values for these
demographic subgroups, and highlights some cases where they differ significantly
from the total sample population.
Table 3. Summary of entrepreneur individual characteristics (n ¼ 53)
Age
Younger than 30 15.1%
30 – 39 17.0%
40 – 49 43.4%
50 or older 24.5%
Years of business experience
Less than 5 years 7.5%
5 – 10 years 15.1%
More than 10 years 77.4%
VC knowledge (self-assessed)
Novice 5.7%
Average 28.3%
More than average 54.7%
Expert 11.3%
Country of greatest VC financing experience
Canada 73.6%
USA 22.6%
Other 3.8%
Industry of greatest VC financing experience
Biotech/life sciences 11.3%
Information tech/telecom 67.9%
Other technology 11.3%
Manufacturing 3.8%
Services 1.9%
Other non-tech 3.8%
Total VC rounds
None 11.3%
One 32.1%
Two or three 18.9%
More than three 37.7%
Total VC funding
Less than $1m 26.4%
$1 – 10m 47.2%
More than $10m 26.4%
Size of most recent round
Less than $1m 45.3%
$1 – 10m 47.2%
More than $10m 7.5%
Note that the data in Table 5 demonstrate several interesting relationships. First,
the novice entrepreneurs value Terms and conditions, Value-added services,
Reputation and Ease of deal making higher than is the case for the sample as a
whole. They do not value Skill and independence or Personal compatibility at this
stage. Entrepreneurs recently doing small deals of less than $1 million (who include
many novices) especially value Terms and conditions and the Ease of deal making, but
they do not value Skill and independence at this stage. Seed-stage entrepreneurs
especially value the Reputation of the VC, and do not value Skill and independence at
this stage. But the seed-stage entrepreneurs also do not value Ease of deal making,
unlike novices in general and unlike entrepreneurs doing small deals in particular.
Table 4. Comparison of espoused and conjoint importance
Criterion Espoused (n ¼ 59) Conjoint (n ¼ 53)

Valuation 14.3 28.0
Terms and conditions 15.6 13.8
Value-added services 12.8 7.6
Reputation 13.2 10.7
Skill and independence 13.5 8.1
Personal compatibility 16.4 20.9
Ease of deal making 14.0 10.9
Note: Importance values have been normalized to total 100 within each column.
Table 5. Conjoint importance by entrepreneurial types
Type Valn T&C Svcs Rep Skill Pers Ease adj. R2 n

All entrepreneurs 28.0 13.8 7.6 10.7 8.1 20.9 10.9 0.76 53
Novice 26.7 16.7** 9.2** 12.8** 7.1** 15.4** 12.2* 0.70 18
Average 29.4 12.8* 6.8* 9.1** 8.6 23.5** 9.9* 0.79 18
Experienced 28.3 12.1* 6.5** 10.2 8.7 23.8** 10.5 0.78 17
Recent 5$1M 25.6 16.9** 7.7 11.5 7.5* 18.5 12.3* 0.73 24
Recent $1 – 10M 31.0 11.0* 7.1 9.4* 8.5 23.1* 10.0* 0.76 25
Seed stage 26.9 13.6 6.9* 13.3** 7.4* 22.0 9.8* 0.79 18
Launch stage 27.6 12.2* 6.8* 10.0 8.6 22.9* 11.8 0.72 19
*Different from ‘All entrepreneurs’ at p ¼ 0.01.
**Different from ‘All entrepreneurs’ at p ¼ 0.001.
The situation is markedly different for the average and experienced

entrepreneurs, for entrepreneurs doing larger deals ($1 – 10 million range) and for
entrepreneurs past the seed stage and now at the launch stage. These entrepreneurs
generally place much higher importance on Personal compatibility and lower
importance on Terms and conditions, Value-added services and, to a lesser extent,
Ease of deal making.
Finally, it is evident from Table 5 that all entrepreneurs placed their highest level
of conjoint importance on the Valuation that a VC assigns their business, which in
turn determines how much equity investment they must surrender to the VC. All
entrepreneurs considered this ‘price’ to be the primary selection criterion; there are
no statistically significant differences between the various subgroups.
What Entrepreneurs Actually Value with Experience

Because the importance of experience with VCs was an important dimension in
Table 5, and the conjoint importance values differed markedly from espoused values
for the whole sample, we analysed this aspect further by examining both conjoint
and espoused values separately for the novice, average and experienced entrepre-
neurs. For the conjoint importance data, some major statistically significant
differences were evident for all three groups. These differences are highlighted in
Table 6.
We note from Table 6 that, in the conjoint choice simulations, the most important
three conjoint criteria were Valuation, Personal compatibility or Terms and conditions
for all three subgroups, although ranked in a different order by the novice
entrepreneurs. The novice entrepreneurs ranked Terms and conditions ahead of
Personal compatibility, in contrast to the more experienced entrepreneurs. At the
other end of the scale, Value-added services and Skill and independence were ranked 6
or 7 for all three subgroups and therefore were reported as the least relevant in the
choice of venture capitalist.
The average and experienced entrepreneurs were not significantly different from
each other in their importance scores and assigned identical rankings to all criteria.
Apparently, with moderate to high levels of experience in business and with venture
capitalists, these entrepreneurs judge venture capital opportunities similarly. But the
novice entrepreneurs were significantly different from the other entrepreneurs and
assigned different rankings on six of the seven criteria. Apparently experience
matters to most choice criteria, but not to questions of price.
With increased experience, entrepreneurs place increased actual importance on
Personal compatibility and decreased importance on the more legalistic Terms and
conditions. From Table 5, it appears that these results are robust to a variety of
measures of experience, besides the self-assessed experience scale used in Table 6.
The pattern of results is consistent for increasing deal sizes, and for greater lifecycle
maturity of the firm.
What Entrepreneurs Claim to Value

Having examined subgroup differences in actual importances, we observed the
espoused importances for the subgroups to investigate differences in reporting
accuracy. Tables 6 and 7 contrast the criteria importance values obtained for the
conjoint and espoused methods in our research for each of the three experience
subgroups.
Table 6. Conjoint importance by entrepreneurial experience
Types of entrepreneur
Criterion Novice Average Experienced
Valuation 26.65 (1) 29.40 (1) 28.30 (1)
Terms and conditions 16.72 (2)* 12.75 (3) 12.07 (3)
Value-added services 9.21 (6)* 6.82 (7) 6.47 (7)
Reputation 12.75 (4)* 9.08 (5) 10.15 (5)
Skill and independence 7.07 (7)* 8.58 (6) 8.71 (6)
Personal compatibility 15.40 (3)* 23.49 (2) 23.76 (2)
Ease of deal making 12.19 (5)* 9.87 (4) 10.53 (4)
Note: Mean values on 100-point normalized scale (rank order among seven criteria).
*Different from ‘Experienced entrepreneurs’ at p ¼ 0.01.
Table 7. Espoused importance by entrepreneurial experience
Valuation 14.72 (3) 13.60 (5)* 14.78 (3)
Terms and conditions 15.16 (1/2)* 15.94 (2) 16.54 (2)
Value-added services 18.02 (6)* 12.13 (7) 12.24 (6/7)
Reputation 13.85 (5) 12.87 (6) 13.68 (4)
Skill and independence 14.59 (4)* 13.89 (4)* 12.24 (6/7)
Personal compatibility 15.16 (1/2)* 16.81 (1) 17.16 (1)
Ease of deal making 13.12 (7) 14.76 (3)* 13.15 (5)
Note: Mean values on 100-point normalized scale (rank order among seven criteria).
*Different from ‘Experienced entrepreneurs’ at p ¼ 0.01.
It is evident from Table 7 that, when espousing criteria importance, Terms and
conditions was emphasized increasingly more as the experience with VCs of the three
groups increased. With more experience, entrepreneurs said they were more
interested in the details of the deal and with the possible constraining effects these
details may create. Similar increases in importance were observed for Personal
compatibility, suggesting that as entrepreneurs gain experience they place greater
importance on the quality of the relationship with their VCs. Value-added services
and Skill and independence were emphasized increasingly less as the level of
experience with VCs increased. With more experience, entrepreneurs said they were
less interested in the non-monetary components of venture capital investments.
The average and experienced entrepreneurs were similar to each other; they were
not significantly different on four of seven espoused criteria. They differed only in
that experienced entrepreneurs put more emphasis than average entrepreneurs on
Valuation, but put less emphasis on the Skill and independence of the VC and the
Ease of deal making. In contrast, the novice and average entrepreneurs were
significantly different from each other on all seven espoused criteria (at p ¼ 0.05 for
Skill and independence and p ¼ 0.001 for the other six criteria).
Discussion
Our results indicate that Valuation is a unique criterion in VC financing deals. All
entrepreneurs rate it most important, yet do not reflect this importance in what they
espouse. This result is consistent with the body of consumer choice literature in
which price is a non-compensatory criterion – meaning that there may be no
combination of desirable other criteria that can sufficiently compensate for a poor
Valuation. We know from micro-economics that price elasticity measures how
responsive demand is to a change of price (in our case, valuation). Demand is
inelastic if small changes in valuation do not affect the decision maker and,
conversely, it is elastic if demand changes greatly. Decision makers are less price-
sensitive when alternatives are hard to find or when they cannot compare the quality
of substitutes (Samuelson and Nordhaus, 2000). In contrast, the other VC choice
criteria may be compensatory in that (for example) a poor Services offering may be
compensated by an unusually high Reputation. We hypothesize that Valuation may
exhibit a threshold effect in which very low offers from a VC may be sufficient to rule
out the potential deal in a non-compensatory fashion, but where sufficiently higher
offers may then proceed to a compensatory trade-off among the other criteria.
Besides this common finding for all entrepreneurs, these results also indicate that
experience level is an important factor in how entrepreneurs evaluate and choose
among VC financing sources. Examination of the demographic subgroups has shown
that there are some differences among entrepreneurs – not all entrepreneurs make the
venture capital-sourcing decision on the same basis. These differences may reflect the
different challenges faced by entrepreneurs at different stages in their company’s
growth, having different personal experience, and different perceived negotiating
strengths and risks.
It appears that, in practice, novice entrepreneurs care about Terms and conditions
and Value-added services, and give little consideration to the remaining criteria.
Novices are looking for lots of help, quickly (perhaps even desperately, owing to the
importance of timing the capital infusion into a new venture about to take off),
which suggests that they have not yet learned how important a long-term
relationship with their VC is for successfully growing firms.
Entrepreneurs seeking small investments also place high importance on the Terms
and conditions of the investment, perhaps because of the correlation between novice
entrepreneurs and small investments, but perhaps also because the impact of these
conditions will constitute a higher percentage of their transaction costs on a
relatively small amount of capital. Also, this could reflect a concern among nascent
entrepreneurs that venture capital investment may impose onerous operational
constraints. Entrepreneurs are less willing to acquiesce to Terms and conditions when
the corresponding amount of capital obtained is small.
Entrepreneurs seeking seed investments (a group that includes many novices) do
not place much value on Deal making ease. This may be because seed-stage
entrepreneurs are still trying to get the new venture off the ground; delays are not as
important as they are for launch-stage entrepreneurs, who are trying to keep their
venture flying and cannot afford long delays or difficulties in getting more money.
Surprisingly, they do not value Value-added services to the same extent as the pure
novices group – indicating that these two groups do not overlap perfectly; some seed-
stage entrepreneurs are not novices (they may be serial entrepreneurs) and may
substitute these services by emphasizing Reputation. VC reputation matters much
more to entrepreneurs at the seed stage, suggesting that the legitimacy effects of
associating with VCs of good reputation matter especially for entrepreneurs facing
extreme liabilities of newness.
But the importance of Reputation and Value-added services drops with increasing
levels of entrepreneurial experience with VC financing, being supplanted by
increased importance of Personal compatibility. With increased experience, the
average and experienced entrepreneurs have apparently learned that the current
investment will have to be followed up with subsequent rounds if they succeed, and
that VC-brokered services can be highly variable and discretionary. Therefore a
continued long-term compatible relationship with their VC is important. In this
interpretation, we are consistent with the theory that postulates an influence in
relationship dyads from social capital to knowledge acquisition and exploitation

(Yli-Renko et al., 2001). The experienced entrepreneurs still care primarily about
Valuation, but the actual importance of Personal compatibility rises to a close second.
This increase in actual importance is the most salient difference between novices and
more experienced entrepreneurs.
The results also suggest that entrepreneurs are inaccurate in their espoused views;
actual importances are not clearly reflected when entrepreneurs are asked about their
criteria. The existence of significant differences in importances derived from
espoused and conjoint methods suggests that entrepreneurs are subject to social
desirability biases when espousing their choice criteria and processes, or that they
may be genuinely poor at introspection into their capital-sourcing decision processes.
As with many compensatory consumer decisions, entrepreneurs like to believe that
they consider many criteria of relatively equal weight. But in practice, some criteria
tend to dominate their decision making, and in ways that are not readily apparent to
the decision makers. For example, all subgroups of entrepreneurs under-rank
Valuation in their espoused views, which may reflect a social desirability bias among
entrepreneurs concerned that either they should not be seen to be so price-motivated,
or that they should appear to be considering very many criteria on such a complex
and important business decision. Correspondingly, most entrepreneurs espouse over-
rankings for VC Skill and independence; the espoused criterion is inflated due to
social desirability bias, but becomes relatively less important in actual financing
choices.
Within subgroups, the novices claim to care more about Terms and conditions and
Personal compatibility than about Valuation (contrary to what they practise). In
contrast, the more experienced entrepreneurs recognize and espouse the increased
importance of Personal compatibility over Terms and conditions. Apparently, the
experienced entrepreneurs felt somewhat more self-confident when negotiating with
venture capitalists than the average entrepreneurs.
Table 8 provides a comparison of espoused importance to actual importance for
each of the three subgroups, represented as the error in the espoused values. Some of
these errors are common to entrepreneurs at all experience levels (whether through
common social desirability bias or common introspection inaccuracies): they
underrate the actual importance of Valuation, and overrate the importance of
both Value-added services and Skill and independence. But some of these errors
are also related to the experience level of the entrepreneurs. We note that, with
increased experience, the error in espoused views has increasing mean but decreasing
variance – experienced entrepreneurs are more precisely wrong in what they say
about choosing VC financings.
Consistent with Smith (1999), our results suggest that the capital-sourcing decision
is a complex one in which entrepreneurs attempt to assess and integrate information
about many criteria. They believe it is important to consider a breadth of
information and devote time and energy to obtaining such information. This belief
holds for the various subgroups examined. In the espoused criteria of entrepreneurs,
we confirm Smith’s finding that entrepreneurs with more fundraising experience will
place decreased importance on the Value-added services of the prospective VC
investor. But we do not confirm Smith’s finding that they will place decreased
importance on the Reputation of the VC. In practice, Reputation appears to remain
Table 8. Espousal error
Valuation 744.8% 753.7% 747.8%
Terms and conditions 79.3% 25.0% 37.0%
Value-added services 45.5% 77.8% 89.2%
Reputation 8.6% 41.7% 34.7%
Skill and independence 106.3% 61.9% 40.6%
Personal compatibility 71.6% 728.4% 727.8%
Ease of deal making 7.6% 49.5% 26.8%
Mean 16.0% 26.3% 21.8%
S.D. 48.0% 48.6% 45.9%
Note: Based on normalized values taken from Tables 6 and 7. Error is defined as difference
between espoused and actual importance, as a percentage of actual importance. Positive value
indicates situations where the claimed importance exceeds the actual importance in practice;
negative values indicate the reverse.
relatively unimportant to entrepreneurs of all experience levels; it is dominated by

the much more important criteria of Valuation, Personal compatibility and Terms and
conditions.
Regarding the importance of individual criteria, the conjoint analysis reveals that
in the simulated choice scenarios, all entrepreneurs place significantly higher
importance upon Valuation. It appears that entrepreneurs seeking financing are
primarily price shoppers. The other criterion of notable high conjoint importance is
Personal compatibility. It appears that, in practice, all entrepreneurs place high value
on the quality of the relationship with their VC investor. It is possible that they view
this relationship quality as a moderator of all other benefits that flow from the VC,
such as Value-added services. The conjoint analysis also reveals that entrepreneurs
place low importance upon Value-added services, and upon the Skill and
independence of prospective VC investors. This suggests that, in addition to being
price shoppers, entrepreneurs are not especially looking for ‘smart money’ – financial
capital from an investor capable of providing a range of additional services to help
the business thrive. Instead, they are simply seeking money at a good price, from
someone they can work with.
Conclusions
This paper has been an attempt to investigate the entrepreneur – VC market from the
little-researched entrepreneurial perspective, using methodology adopted from other
domains of the management literature. We have found that entrepreneurs are
generally poor in articulating or understanding their own capital-sourcing
decision processes; the criteria they use to make capital-source decisions are not
what they claim to use, nor applied with the weights they claim. The lack of
discrimination among the espoused importance results, along with the breadth of
suggested additional criteria, suggests that the capital-sourcing decision is a complex
Figure 2. Generalization of the model to VC selection
one in which entrepreneurs believe that they attempt to assess and integrate
information about many criteria. They believe it is important to consider a wide
range of information and devote significant time and energy to obtaining this
information.
But the results of the conjoint simulation research tell a different story. When
faced with hypothetical financing choices of only seven criteria, and at two or three
levels for each criterion, entrepreneurs appear to be ready to make substantial
simplifications to reduce the decision complexity. In practice, they simplify the
decision to be substantively driven by Valuation, Terms and conditions and Personal
compatibility criteria. And the manner of the simplification depends on the
experience level of the entrepreneur. Overall, the results suggest that attempts to
understand how entrepreneurs make their capital-sourcing decisions must be wary of
the potential biases inherent in espoused approaches.
On the basis of our results, we now propose extensions to the theoretical model of
Reuber and Fischer (1999) and Westhead et al. (2005); this revised model is shown in
Figure 2. First, we demonstrate the generality of the model to include the domain of
entrepreneurial finance, and explicitly note the fit of various constructs from our
study and from the predecessor studies. Secondly, we model the feedback of stream
of experience to stock of experience that provides the mechanism for learning and
change, as a function of entrepreneurial experience. As entrepreneurs take decisions
and actions they achieve particular performance results. These results form the basis
for the stream of experience the new venture encounters. Over time, these experiences
accumulate as the entrepreneur’s stock, and act to influence both the expertise of the
entrepreneur and the dominant logic and cognitions that are applied to future
decision making.
With respect to our specific hypotheses, we first note that entrepreneurs appear to
use a complex decision process that exhibits both non-compensatory and
compensatory criteria evaluations, a process which is subject to the effects of
expertise and of dominant logic cognitions. Hypothesis 1 is thereby supported, as
Valuation appears to be non-compensatory and independent of experience, while the
other criteria can be compensated in the structure of VC term sheets being offered to
entrepreneurs.
Next, we have found that experience matters in both the actual criteria used, and
the accuracy with which entrepreneurs espouse these criteria. From Tables 5 and 6, it
can be seen that significant differences in actual criterion importance occur among
the three subgroups of entrepreneurs for six of the seven criteria examined.
Hypothesis 2 is thereby supported, and we conclude that the relative importances of
actual choice criteria do change as entrepreneurs gain experience with VC financing.
With respect to the model of Figure 2, we propose that the flow of experience from
actual VC financing transactions contributes to the stock of the entrepreneur’s
experience, and that the entrepreneur thereby develops the expertise to negotiate
more effectively in future financing deals and to adjust the actual importance and
weightings given to the various decision criteria. In this way, the upper branch of the
model explains the evolution of actual choice criteria as experience accumulates.
From Tables 7 and 8, it can be seen that the variability of espousal errors decreases
as entrepreneurs gain experience; although inaccurate espousals remain even with
experienced entrepreneurs, they becomes less wide-ranging than for novices. We
suggest that two additional types of learning are occurring, both of which are
explained by the lower branch of the Figure 2 model. First, with increased
entrepreneurial experience, the dominant logic stabilizes under the effects of a range
of well-known cognitive biases such as confirmation bias and availability bias.
Whether the dominant logic is correct or incorrect, under the effects of these biases,
it tends to be reinforced by the accumulation of additional experience. Secondly,
with this stability in the dominant logic cognitions, the more experienced
entrepreneurs may also become more self-confident in their opinions and more
willing to espouse views that are at odds with perceived social desirability. For
example, all entrepreneurs rate Skill and independence as unimportant in actual
practice, but only the experienced entrepreneurs are willing to say so when asked.
Hypothesis 3 is therefore supported, and we conclude that the precision of
entrepreneurs’ espousing with respect to their choice criteria improves as they gain
experience with VC financing.
Contributions
In this research, we have demonstrated that the model by Reuber and Fischer (1999),
as extended by Westhead et al. (2005), can be used in a venture capital industry
context and therefore appears to be generalizable beyond its initial context. We have
also added a feedback loop to the model from ‘Performance and Aspirations’ to
‘Stock of Experience’ to illustrate the effects of outcomes on expertise and on
dominant logic cognitions. We thereby emphasize the ‘stream’ aspect of the process
of gaining ‘stock’ experience, which can involve both positive and negative learning.
The incremental experience gained by entrepreneurs seeking venture capital and the
actions taken on selection criteria used with term sheets both vary with stock of
experience in place (i.e. between novice, average and experienced entrepreneurs).
We have also demonstrated that the espoused criteria of entrepreneurs are
unreliable as a basis for predicting the actual behaviour of entrepreneurs in response
to VC term sheets. Contrary to what they espouse, all groups of entrepreneurs
consider valuation to be the primary criterion, and also view the quality of the
relationship with the VC as important. Valuation (price) is non-compensatory,
whereas the other criteria are compensatory.
These results may have practical value for VC investors trying to more successfully
attract desirable entrepreneurs and improve the quality of their dealflow. The
espoused importance results may give some perspective on factors to be considered
in the initial stages of evaluation – investor attributes that can initially interest and
attract an entrepreneur. But the conjoint importance results give an insight into what
really matters as negotiations progress – the entrepreneur’s decision to accept or
reject a term sheet will depend mostly on Valuation and Terms and conditions,
moderated by the quality of the Personal relationship between the entrepreneur and
the VC. Other factors will likely pale in importance to the entrepreneur.
These results may also have corresponding practical value for entrepreneurs
seeking financing. The discrepancies identified in this multi-method study should
alert entrepreneurs to the potential for inaccurate introspection, and enable them to
make explicit adjustments in their decision processes so as to achieve the criteria
weightings they consciously desire. Entrepreneurs, especially novices to seeking
venture capital, can learn that they do not need to resort to espoused criteria for
selection that are different from those used in decision making. This is a strategy used
successfully by experienced entrepreneurs.
Limitations
This study is subject to some limitations to overall validity. With respect to the
sample of entrepreneurs, and despite efforts to enrol entrepreneurs from a wide range
of businesses and with a wide range of experience, the sample is ultimately self-
selected from the population that fell within the sample frame. As a result of this,
extreme views may be overrepresented. But it is unlikely that this has systematically
biased our results, as it is unlikely that a strong preference for one or another
criterion would be correlated with willingness to participate in the survey. The
sample frame also excluded entrepreneurs (both successful and not) who have
deliberately avoided venture capital financial sources as part of their financing
strategies.
And the study design did not assess the desirability of the subject entrepreneurs,
from the perspective of potential VC investors. As such, it did not investigate
whether the obtained results are specifically applicable to the most desirable
entrepreneurs.
The responses for espoused and conjoint criteria are also vulnerable to self-report
bias. Although attempts have been made to minimize this threat to validity, the
obtained data have not been triangulated through multi-trait, multi-method
approaches. Moreover, the conjoint research technique, while providing much
improved insight into actual capital-sourcing decisions of entrepreneurs compared to
previous research, is still limited as a measure of intent rather than actual behaviour.
In particular, it is likely that entrepreneurs completing the conjoint survey spent less
time evaluating the bundles than they would a real financing offer, and therefore may
have employed a different simplification rule than they would in practice. The
conjoint results should therefore be corroborated against measures of real financing
deals completed by entrepreneurs.
Finally, our operationalization of price, as the Valuation measure, assumed a
simple cash-for-equity (or equity equivalent) deal. It is possible that venture capital
investments structured as debt or hybrid mezzanine forms may exhibit different price
importance characteristics.
Future Research
This research, as an extension to Smith’s initial foray into this area (Smith, 1999),
represents a modest start to improving our understanding of the entrepreneur’s side
of the venture capital market. The best entrepreneurs have choices in where they will
source the capital they may require. Developing a rich understanding of how these
choices are made has valuable implications both for practitioners (VC investors,
entrepreneurs and the like) and for market theorists. As a first step, the present
research necessarily leaves many questions remaining. One important question is the
degree to which these improved conjoint importance values more accurately reflect
real-world financing decisions. With real-world financing decisions, the stakes for the
entrepreneur are high and the pressures to maximize deal utility, while minimizing
deal making costs, are felt more acutely. The degree to which these competing
pressures may differentiate in-use criteria from conjoint criteria is not known.
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When Entrepreneurs Choose VCs Experience, Choice Criteria and Introspection Accuracy

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When Entrepreneurs Choose VCs Experience, Choice Criteria and Introspection Accuracy

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Venture Capital,

Vol. 9, No. 4, 285 – 309, October 2007

When Entrepreneurs Choose VCs:

(Accepted 4 May 2007)

KEY WORDS: Venture capitalist choice, entrepreneurs, experience, espoused behaviour,

ISSN 1369-1066 Print/1464-5343 Online/07/040285-25 Ó 2007 Taylor & Francis

The Research Questions

related deﬁnitions and concepts under a single construct. Examples of constructs

Hypothesis 1: Entrepreneurs use dominant logic cognition (i.e. both non-

The importance of prior experience as suggested by Westhead et al. (2005) and

Hypothesis 2: The relative importance of choice criteria will change as entrepre-

Finally, the somewhat contradictory and unclear ﬁndings by Westhead et al.

Hypothesis 3: The consistency of ranking the choice criteria at introspection stage

with real-world attribute bundles (such as when the importance of criterion A

(1) Valuation. Valuation of the entrepreneur’s company to determine how much

the entrepreneur’s ﬁrm, or as the amount of equity demanded by the VC (Bruno

Participants were asked to rate the relative importance of each criterion

VC investment deals in the real world. Table 1 describes the combinations of

Results and Analysis

Table 1. Conjoint bundles

Attribute Low level High level

Table 2. Summary of ﬁrm characteristics (n ¼ 53)

Table 3. Summary of entrepreneur individual characteristics (n ¼ 53)

Table 4. Comparison of espoused and conjoint importance

Criterion Espoused (n ¼ 59) Conjoint (n ¼ 53)

Table 5. Conjoint importance by entrepreneurial types

Type Valn T&C Svcs Rep Skill Pers Ease adj. R2 n

The situation is markedly diﬀerent for the average and experienced

What Entrepreneurs Actually Value with Experience

What Entrepreneurs Claim to Value

Table 6. Conjoint importance by entrepreneurial experience

Table 7. Espoused importance by entrepreneurial experience

relationship dyads from social capital to knowledge acquisition and exploitation

Table 8. Espousal error

relatively unimportant to entrepreneurs of all experience levels; it is dominated by

Figure 2. Generalization of the model to VC selection

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