Abstract
This study explores and identifies the investment criteria used by South African venture capitalists in their venture screening and evaluation processes. Using a Likert scale type of questionnaire, South African venture capitalists (VCs) were asked to rate the investment criteria identified in similar studies abroad and to report any additional criteria of their own. By evaluating the mean ratings, it was found that South African VCs consider the entrepreneur’s honesty and integrity; a good expected market acceptance; and a high internal rate of return (IRR), to be the three most important criteria. The South African VCs, just like their overseas counterparts, regard management considerations to be the most important criteria group in the evaluation of new investment projects. The results of this study are deemed useful to both venture capitalists in their decision-making process and to entrepreneurs in their venture capital applications to maximise their success rate.
Highlights
Venture capital is a major source of funding for the entrepreneurial community and usually focuses on early stage, more risk-orientated, pre-initial public-offering business endeavours
This study explores and identifies the investment criteria used by South African venture capitalists in their venture screening and evaluation processes and compares these criteria with the results obtained in similar studies abroad
By identifying the criteria that are deemed as important, venture capitalists can enhance their decision-making processes and entrepreneurs can adjust their preparations for venture capital applications to maximise their success rates
Summary
Venture capital is a major source of funding for the entrepreneurial community and usually focuses on early stage, more risk-orientated, pre-initial public-offering business endeavours. Entrepreneurs usually start and run on a shoestring budget and will seek venture capital once they are in a position to expand their businesses. The importance of investment decision criteria becomes obvious with the fact that most venture capital firms are operated by a lean staff and that they are inundated with proposals that become a significant bottleneck in their operations (Larsson & Roosvall 2000:21). This will have an effect on productivity since much of their time will be spent evaluating and rejecting flawed proposals (MacMillan, Siegel and Subba Narasimha, 1985).
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