Venture capital research: What criteria do VCs use, and how important are they? B&M Business Development

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Venture capital research: What criteria do VCs use, and how important are they?
An Empirical Study about Early-Stage IT and Internet Venture Capitalists in the Netherlands, Singapore, and Sweden.
B&M Business Development - www.bmbd.nl

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Venture capital research: What criteria do VCs use, and how important are they? B&M Business Development

  1. 1. Venture Capitalists’ Product and Market Related Investment Criteria An Empirical Study about Early-Stage IT and Internet Venture Capitalists in the Netherlands, Singapore, and Sweden B&M Business Development Thomas Mensink, BSc. December 2010
  2. 2. Content• Introduction• Research scope• Research question• Research design• Limitations• Findings• Conclusions B&M Business Development - www.bmbd.nl - info@bmbd.nl
  3. 3. Introduction• VCs use investment criteria to evaluate the proposals and assess the ventures’ potential• This study zooms in at the investment criteria that VCs use and their relative importance• Research in cooperation with University of Twente B&M Business Development - www.bmbd.nl - info@bmbd.nl
  4. 4. Research scopeIT and Internet industryEarly-stageDue diligence phaseThe Netherlands, Singapore, and Sweden B&M Business Development - www.bmbd.nl - info@bmbd.nl
  5. 5. Research questionWhat investment criteria do VCs use – and how important are these criteria – when they evaluate ventures’ proposals? B&M Business Development - www.bmbd.nl - info@bmbd.nl
  6. 6. Research design• Data collection Stap 1: preliminary questionnaire Stap 2: interviews Stap 3: final questionnaire• Data analysis Importance of criteria on 5-point scale Rejection rate analysis B&M Business Development - www.bmbd.nl - info@bmbd.nl
  7. 7. Limitations• General Desirable responses by VCs Criteria are in fact interrelated Criteria change over time• Research specific Do the criteria correspond to reality? Ex post facto rationalization of the investment decision B&M Business Development - www.bmbd.nl - info@bmbd.nl
  8. 8. Findings• Research sample Singapore Sweden The Netherlands Total research population 30 22 20 Interview (incl. preliminary questionnaire) 14 (46.7%) 13 (59.1%) 14 (70%) Final questionnaire 11 (36.7%) 10 (45.5%) 12 (60%) Total no. of unique participating VCs 17 (56.7%) 13 (59.1%) 16 (80%) B&M Business Development - www.bmbd.nl - info@bmbd.nl
  9. 9. Importance of criteria - most important The Netherlands Singapore Sweden Rank Criterion Mean Criterion Mean Criterion Mean The technology provides a The revenue model is sustainable competitive 1 scalable 4.83 The technology is scalable 4.64 edge 4.40 The revenue model is People will pay for the 2 The technology is scalable 4.67 scalable 4.55 product 4.22 The entrepreneur can The technology provides a The venture has a large demonstrate a market sustainable competitive growth potential 3 demand 4.67 edge 4.45 4.22 The product has a strong The target market has a Capable of sustained value proposition for a 4 large growth potential 4.67 intense effort 4.45 specific target market 4.22 The implied growth rate between the ventures size People will pay for the The target market has a today and in 3-5 years is 5 product 4.64 large growth potential 4.45 realistic 4.22 B&M Business Development - www.bmbd.nl - info@bmbd.nl
  10. 10. Importance of criteria - least important The Netherlands Singapore Sweden Rank Criterion Mean Criterion Mean Criterion Mean The product is different I am already familiar with The product is different than the trend in the the entrepreneur’s than the trend in the 76 market 1.92 reputation 2.73 market 2.13 The product is different The venture will create a The venture will create a than the trend in the new market 75 new market 2.33 market 2.82 2.38 I am already familiar with The venture will transform the entrepreneur’s The venture will create a the market 74 reputation 2.58 new market 2.91 2.50 I am already familiar with The venture found a niche The revenue model is the entrepreneur’s 73 market 2.64 proven internationally 2.91 reputation 2.56 The product is consistent Has a personality The product is conform with corporate strategy of 72 compatible with mine 2.67 the trend in the market 3.00 my company 2.60 B&M Business Development - www.bmbd.nl - info@bmbd.nl
  11. 11. Importance of criteria - categories The Netherlands Singapore Sweden ! Rank Category Mean Category Mean Category Mean Characteristics of the product The entrepreneurs The entrepreneurs 1 or service 3.69 personality 4.02 personality 3.60 The entrepreneurs 2 personality 3.68 Financial considerations 3.82 Characteristics of the market 3.49 Characteristics of the product Characteristics of the product 3 Characteristics of the market 3.66 or service 3.75 or service 3.41 4 Financial considerations 3.56 Characteristics of the market 3.70 Financial considerations 3.37 The entrepreneurs The entrepreneurs The entrepreneurs 5 experience 3.45 experience 3.48 experience 3.20 B&M Business Development - www.bmbd.nl - info@bmbd.nl
  12. 12. Essential criteria - one criterion Rejection rate The Criterion Netherlands ! Singapore Sweden The revenue model is scalable 83% 55% 22% The entrepreneur can demonstrate a market demand 75% 45% 22% The technology is scalable 67% 64% 20% The target market has a large growth potential 67% 45% 11% The product has a strong value proposition for a specific target market 67% 55% 44% People will pay for the product 64% 55% 56% The product is a must to have or need to have 58% 27% 11% The venture has a large growth potential 58% 55% 33% There is a large total available market 58% 36% 11% The product is scalable across geographies and has international potential 50% 55% 22% B&M Business Development - www.bmbd.nl - info@bmbd.nl
  13. 13. Essential criteria - two criterion Rejection rate Criteria The Netherlands ! Singapore Sweden The revenue model is scalable 100% 64% 30% The entrepreneur can demonstrate a market demand The revenue model is scalable 100% 73% 60% People will pay for the product The revenue model is scalable 92% 73% 30% The technology is scalable The revenue model is scalable 92% 64% 20% The target market has a large growth potential The revenue model is scalable The product has a strong value proposition for a specific 92% 73% 50% target market The entrepreneur can demonstrate a market demand 92% 64% 20% The technology is scalable The entrepreneur can demonstrate a market demand 92% 73% 20% The target market has a large growth potential The technology is scalable 92% 82% 70% People will pay for the product The entrepreneur can demonstrate a market demand The product has a strong value proposition for a specific 83% 73% 40% target market The entrepreneur can demonstrate a market demand 83% 64% 70% People will pay for the product B&M Business Development - www.bmbd.nl - info@bmbd.nl
  14. 14. Conclusions• This research confirms the conclusion of previous literature that the entrepreneur is overall the most important• But on individual criterion level: More product and market related criteria score higher Product and market related criteria have a higher rejection rate• Therefore: product and market related criteria are more important than entrepreneur related criteria B&M Business Development - www.bmbd.nl - info@bmbd.nl
  15. 15. More information• Find out more on www.bmbd.nl• Download here the management summary• Download here the full version of the report B&M Business Development - www.bmbd.nl - info@bmbd.nl
  16. 16. B&M Business Development Haaksbergerstraat 252 7513 EE Enschede The Netherlands www.bmbd.nl www.technolister.com info@bmbd.nl +31 (0)53 450 00 12

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