Classification and Analysis of Criteria Used in the Due Diligence Process

Ma Camino Ramón-Llorens,Ginés Hernández-Cánovas

doi:10.5539/ijbm.v7n6p81

Abstract

This paper uses a survey dataset of 51 Venture Capital Companies to address a segmentation of the venturecapital industry. Our paper yields two specific contributions. First, we analyze in a Continental European bank-based system the most important investment criteria identified by previous empirical literature. Second, we show that existing differences in the use of the investment criteria depend on the existence of asymmetric information problems associated to specific characteristics of the venture capital companies. Knowing what investment criteria are the most important for venture capitalists might help both entrepreneurs to elaborate better proposals, and venture capitalists to improve their decision process and achieve better survival rates.

Highlights

Variation in the use of the investment criteria across venture capital companies has received a great deal of attention in recent empirical research
This study examines the investment process of a sample of 51 venture capital firms in order to perform a segmentation of the venture capital industry on the basis of the most important selection criteria identified by previous empirical literature
Our results reveal the existence of a relationship between the investment criteria used in the evaluation of new business proposals and the existence of asymmetric information problems linked to the specific characteristics of the venture capital company

Summary

Introduction

Variation in the use of the investment criteria across venture capital companies has received a great deal of attention in recent empirical research. One line of research shows that the use of investment criteria and their relative importance depend on the existence of asymmetric information problems (Barry, 1994; Fried and Hisrich, 1994). One direct implication of the above studies is the existence of a link between the characteristics of the venture capital company and the investment criteria applied during the due diligence. The analysis of this link by classifying venture capital companies according to any specific characteristic imposes an a priori limitation that assumes standard behaviour of venture capitalists just because their companies share one attribute. A priori classifications limit the possibility of uncovering associations which are not obvious, but that can be helpful once found, and restrict the analysis to one investment criterion at the time, while venture capitalists combine them in the due diligence

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Results

Conclusion