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How Venture Capitalists Evaluate Potential Venture Opportunities

1784 words - 8 pages

MSc Entrepreneurship and Innovation

Entrepreneurship in Science and Technology

Case study:
How Venture Capitalists Evaluate Potential Venture Opportunities

Student: Angeliki Papoutsi (10604707)

Lecturer: Dr. T. Vining

17. 04. 2014

1. Summary of the case and issues that were raised

The case study is about an interview, conducted to four venture capitalists from four of the most prominent VC Silicon Valley firms, Kleiner Perkins Caufield & Byers (KPCB), Menlo Ventures, Trinity Ventures and Alta Partners. These firms invest both in seed as well as in later-stage companies, which operate mostly in the information technology sector. However, each VC has developed ...view middle of the document...

(1986) and Vinig, T., & De Haan, M. (2002) .
With reference to these articles the following list with the most important categories and sub-categories of criteria is composed. The criteria are presented in the list with an attempt of a descending order, according to the importance of each category of criteria and sub-criteria (per category) for the decision-making as presented in the two articles but taking also into account my personal view on the subject.

1) The entrepreneur (personality and experience)
a) Capable of constant intense effort
b) Exhibited leadership ability in the past
c) Thoroughly familiar with the market
d) Has a track record relevant to venture
2) Market characteristics
a) The target market is significantly growing
b) The venture will create a new market
c) The venture will stimulate an existing market
d) There is little threat of competition during the first years (1-3 years)
3) Characteristics of product/ service
a) It is proprietary or can be protected in other ways
b) It enjoys demonstrated market acceptance
c) It is innovative
d) It has a global potential
e) It is on the development stage, to the point of a functioning prototype
4) Financial considerations
a) The investment that can be easily made liquid (e.g., IPO & M&A)
b) Return equal to at least 10 times the investment within 5-10 years
c) Return equal to at least 10 times my investment within at least 5 years

b. Based on your list and the information in the case develop a list of criteria that can be used to evaluate new venture opportunity.
Based on the criteria that are mentioned as most important from all the interviewees in the case the entrepreneurs personality and experience seems less important than the market size and growth rate. What the VC’s care about is for the entrepreneur to be flexible in changing the team members and accepting not being persistent on having a CEO position later on in the company. Also M&A’s don’t seem appealing despite the fact they are considered as logical due to the way the market works at the moment. What the VC’s always prefer is companies that are can be sustainable on their own and can be turned into substantial IPO-able companies. The financials and business model are taken into account mostly as a test of proof that the teams thinking is in the correct direction and can implement well. More factors are taken into account (eg. location, right timing, good understanding of the business model, direct sales etc.) than the ones that were presented in the previously composed list and from the information that are provided the high importance of already presented criteria seems to change.
Taking into account the information in the case and the initially composed list, a new list of criteria with a descending order is attempted here.

1) Market characteristics
a) The market size is big, more than $500 million and up to $1 billion
b) The market is significantly growing
c) The customer has a an important pain point and...

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