Venture Evaluation Research Articles

The exploration play: What do we mean by it?

Among the oil and gas exploration community, the play has an almost mythical status—the successful play is the thing of which legends are made, and playmakers are regarded as heroes of the industry. But what is the play exactly and why do we need it? Curiously, considering the long period it has been in daily use, it has never really been unambiguously defined and, as a result, it has come to be used differently for different purposes. Although the term is in common use, in practice, its imprecision commonly leads us to simply ignore its significance as a concept in our rush to concentrate on prospect definition. These questions arise: Do we really need the play, and can we gain by defining it more precisely? I strongly believe that the play concept is such a valuable one that it should be central to exploration decision making; clustering petroleum accumulations into natural families helps us manage the risks inherent in new and existing venture evaluation. However, I believe that plays can best help us in this way if they comprise meaningful natural groups that we can use both for reliable analog comparison and in meaningful statistical analysis. In this review, I propose a three-tier hierarchic framework for play definition based on (1) the petroleum charge system, (2) the reservoir-seal formation pair or lithofacies, and (3) the trap type. These tiers can be related to the geodynamic, sedimentary, and tectonic events that drive phases in basin evolution, thus placing the concept directly in its geologic context.

What can venture capitalists and entrepreneurs learn from behavioral economists?

Abstract Building upon new findings from the field of behavioral finance and economics, this article provides fresh insights into how venture capitalists (VCs) and entrepreneurs perceive, experience, and deal with risk; and how they go about making decisions in their respective areas of venture creation, venture evaluation, venture growth, and investing. By helping VCs and entrepreneurs to be cognizant of the many psychological traps that continuously get turned on at and around decision‐making times, such findings would certainly help both parties to avoid committing costly mistakes in their businesses. Copyright © 2009 John Wiley & Sons, Ltd.

Effect of owners’ gender on venture quality evaluation

A study was undertaken to determine if there were quality differences between ventures that were forwarded on to a mass merchandiser for buyer review and those that were not. The sample ventures were manufacturers participating in an independent evaluation program for a major US midwest mass merchandiser. The quality issues were based on common management practices and on the marketability of the product being offered to the firm. Ventures that were forwarded for subsequent buyer review were found to be superior in both areas of concern. A separate analysis was run to determine if any gender‐based differences were notable in the evaluation process. With few exceptions, male‐ and female‐owned ventures were of comparable quality when forwarding status was controlled. However, using regression analysis, product quality was found to have the greatest impact on whether or not a female‐owned venture was forwarded, while the quality of the entire venture (product and management practices) was of greater significance for male‐owned ventures.

The effects of human capital, organizational demography, and interpersonal processes on venture partner perceptions of firm profit and growth

Venture teams, which are comprised of two or more partners, are becoming one of the more popular and important modes of new business development. Traditionally, financial capital has been the primary perspective in assessing venture viability. To expand the venture evaluation horizon, we examined the effects of human capital, organizational demography, and interpersonal processes on partner evaluations of venture performance, defined as the presence of profit and growth. The results support this approach in analyzing venture teams, and we propose that this perspective be included in future venture viability assessment, and used for intervention to enhance venture success. Suggestions are provided for future research.

Determining the financial feasibility of privatized military housing initiatives with DSS-delivered quantitative models

The armed services must provide their personnel with acceptable housing at minimum cost within the vicinity of military installations. To help achieve these housing objectives, the Department of Defense (DoD) has entered into experimental joint ventures with private developers to construct attractive housing on military installation property. To support the analysis of the joint ventures, the DoD needed quantitative models that would help officials evaluate the feasibility of the housing projects. A decision support system, called the Housing Revitalization Support Office System (HRSOS), has been developed to deliver the necessary models. A key component of HRSOS is a collection of econometric, project occupancy, and simulation models that determine a project's financial outcomes. This paper describes the models, their role in the joint venture evaluation process, and the decision support system used to deliver the analyses and reports to DoD officials. The paper also presents the benefits from using the model and discusses the implications for public finance and military housing management. Scope and purpose Historically, military housing has been acquired, maintained, and managed through the Department of Defense with public funds. The process has become quite expensive, and military personnel and officials have not always been satisfied with the resulting accommodations. To rectify the situation, the Department of Defense (DoD) established an agency, called the Housing Revitalization Support Office (HRSO), to develop innovative privatization initiatives that would improve the quality of military housing and reduce government expenditures for the accommodations. A decision support system, called the Housing Revitalization Support Office System (HRSO), has been developed to help government officials evaluate, among other things, the financial feasibility of the privatization initiatives. This paper presents the system and its underlying econometric and simulation models, examines the economic and management benefits from using the system, and discusses the implications for public finance and military housing management. The HRSOS situation represents a new application for operations research and other quantitative methodologies. In addition, it further illustrates how such methodologies can be delivered effectively to non-technical managers through decision support systems.

Private Funds, Utility Development, and Government Policy

Between 1995 and 1997, the Clark Development Corporation (CDC) used the joint venture model, a variety of the built-operate-transfer (BOT) model, to attract private funds for utility development in the Clark Economic Zone in the Philippines, located on the site of the former Clark Air Base. The principle elements of the joint venture model were a capital investment by a strategic partner and eventual sale to the public of the CDCs share of the joint venture corporation. Gavieta states that the success or failure of such a program is largely dependent on the conduct of the bid solicitation and the contract award process. Lessons learned from the joint venture experience concerned the absence of construction completion guarantees, performance undertakings, and environmental insurance cover; minimum bid price; tariff caps versus IRR caps; valuation of the existing right of way and equipment qualitative evaluation of bidders; minimum term commitments by joint venture partners; independent third-party venture evaluation of joint venture performance; and corporate governance of joint ventures.

Validation of the venture evaluation model in Korea

This article examines the validity of the venture evaluation model in Korea by directly comparing the relative importance of evaluation criteria on the funding decision with the relative importance of factors influencing venture's empirical performance. Specifically, we first identify the relative importance of evaluation criteria based on whether a deal is accepted or rejected (current evaluation model). Next, we derive the relative importance of those criteria revealed in the empirical performance, based on the success/failure of ventures that overlap with the deals originally used as accepted cases (performance-based model). Finally, to better understand the differences between the two models, we measure the general perceptions of venture capitalists on the importance of those criteria without regard to specific deals (normative model). To identify potentially important criteria, we reviewed the existing related studies on evaluation criteria, and we interviewed 10 venture capitalists. As a result, we selected 31 evaluation items. The questionnaire consists of two parts and deals with the following four cases: In part A: 1. 1. case 1: general perceptions concerning the 31 criteria. In part B: 2. 2. case 2: one of the most successful ventures. 3. 3. case 3: one of the least successful ventures. 4. 4. case 4: one of the rejected ventures. Using a five-point scale, we asked the respondents to rate the 31 criteria based on their general perceptions without referring deals (case 1), and on the specific deals they had handled (cases 2, 3, and 4). To prevent any firm or respondent from affecting the results more than it ought to, we distributed the questionnaire to each firm in proportion to the investment amounts; we also asked the respondents to fill out only one questionnaire including four cases. Seventy-four venture capitalists (including 10 interviewed) responded to this questionnaire. They have worked as investment directors or managers in the top-rated 20 venture capital companies, selected according to investment amounts. On the basis of the ratings of 31 criteria for the previous four cases, we developed three investment models. First, the current evaluation model reveals which criteria are more important in deciding whether or not to fund. The model measures the relative importance of evaluation factors in discriminating between the accept (case 2 and case 3) and the reject (case 4) decision. Second, the performance-based model consists of the relative weights of evaluation factors influencing the two performance categories—success (case 2) and failure (case 3). This model shows the relative importance of evaluation criteria that are reflected in the venture's empirical performance. Finally, we identify the normative model, revealing the venture capitalists' general perceptions concerning the importance of individual criteria in light of their past field experiences (case 1). By comparing the three models, we find that the importance of these criteria revealed from venture capitalists' perceptions and empirical performances is fairly similar but not sufficiently reflected in the actual deal evaluation. In particular, the entrepreneur-related characteristics are not considered the most important in evaluating venture proposals according to the current evaluation model, but they do turn out to be the most important factors in evaluating empirical performance. This is in strong contrast to the findings of some existing studies, which contend that the entrepreneurrelated criteria ultimately determine the funding decision. Instead, the result confirms the previous assertion that the evaluation of managerial capability is the most challenging task in the venture selection process. In the current evaluation model, financing ability is considered more important than either superiority of product and technology or production capability, contrary to venture capitalists' perceptions and empirical performance results. Therefore, it seems necessary to raise the level of specialization of venture capital firms through the acquisition of managerial skills from developed countries and by enhancing the technical background of individual venture capitalists.

Venture capitalists' decision criteria in new venture evaluation

What criteria do venture capitalists use to make venture investment decisions? The criteria venture capitalists use to make their venture investment decisions are of interest for several reasons. First, venture capitalists are conspicuously successful in their investment decisions. The success rate of venture capital-backed ventures is significantly higher than the success rate of new ventures generally (Dorsey 1979: Davis and Stetson 1984). A better understanding of the criteria used could lead to a better understanding of the reasons for this success. Second, a better understanding of the criteria for successful new ventures could lead to an improvement in the success rate of new ventures. Although there is no clear agreement on the precise rate, the failure rate among new ventures is generally viewed as significantly higher than the average failure rate (Dun and Bradstreet 1984; Van de Ven 1980; Shapero 1981). Finally, venture capitalists' investment criteria are of enormous import to entrepreneurs seeking venture funding. Such entrepreneurs require a significant infusion of capital in order to grow their businesses, and knowledge of the criteria sought by venture capitalists can aid entrepreneurs in gaining the necessary financing. This study attempts to uncover the criteria used by venture capitalists through semistructured interviews and verbal protocol analysis of venture capitalists' evaluations of actual venture proposals. Sixteen verbal protocols—in which the participants “think aloud” as they review business proposals— were made of venture capitalists' venture evaluation decisions. The findings of this study suggest that venture capitalists screen and assess business proposals very rapidly: the subjects in this study reached a GO/NO-GO decision in an average of less than six minutes on initial screening and less than 21 minutes on proposal assessment. In venture capitalists' initial proposal screening, key criteria identified include fit with the venture firm's lending guidelines and the long-term growth and profitability of the industry in which the proposed business will operate. In the second stage of proposal assessment, the source of the business proposal also played a major role in the venture capitalists' interest in the plan, with proposals previously reviewed by persons known and trusted by the venture capitalist receiving a high level of interest. In addition to the specific criteria identified and how they were used in reaching GO/NO-GO decisions, the findings of this study also were surprising for the lack of importance venture capitalists attached to the entrepreneur/entrepreneurial team and the strategy of the proposed venture during these early stages of the venture evaluation process.

Project management software — are we being over-persuaded?

Most software packages currently offered for project management for use on micro-computers do not allow one to analyse the data relating to the uncertainty which almost always exists in projects. Thus the PC-supported manager may be misled by easily accessible software so may not undertake a strategic analysis of the project. We argue here that the venture evaluation and review technique (VERT) can provide a rich modelling environment for the assessment of strategic options within complex projects; although its use would be based on a mini-computer. A small example project is used to indicate how VERT may suggest pertinent ‘what if?’ enquiries.

Project analysis today—The end users' disquiet?

The explosive growth in the use of micro-processors in organisations has generated a wealth of software for managerial use. This software is easy to use, flexible and apposite. The software which continues to be used on mini and main-frame computers often offers more sophistication, but unfortunately it is usually less ‘user-friendly’. The major packages currently offered for use on micro-computers do not offer mechanisms to utilize the uncertainty which almost always exists in projects. Thus the PC-supported manager may be misled by easily accessible software, so may not undertake a strategic analysis of the project. In contrast, it is argued here that the Venture Evaluation and Review Technique (VERT) can provide a rich modelling environment for the strategic management of complex projects although its use would be based on a mini-computer. A simple Research and Development project is used to indicated how VERT may suggest pertinent ‘what if?’ enquiries.

A comparison between the VERT program and other methods of project duration estimation

Several authors have compared and proposed exact, asymptotic or simulation methods for estimating or deriving the duration of project networks. These authors have all concentrated on one aspect of uncertainty—time. The results of simulations obtained through the Venture Evaluation and Review Technique (VERT) are compared with those of other authors. A brief exposé of the extra facilities within VERT is also given. That is, the ability to jointly manipulate time, cost and performance measures, as well being able to specify the distribution from which to sample data upon these uncertain measures.

Improving Industrial Readiness with Venture Evaluation and Review Technique (VERT)

The application of the VERT networking technique to the problem of allocation of maintenance funds to improve the response time of the defense ammunition production base is addressed in this paper. Cursory analysis of the application indicates that savings of several million dollars in the form of ammunition inventory avoidance have been obtained by the expenditure of $50,000.

Operations planning with VERT.

The Venture Evaluation and Review Technique (VERT) is a computerized, mathematically oriented network-based simulation technique designed to analyze risk existing in three parameters of most concern to managers in new projects or ventures--time, cost, and performance. As such, the VERT technique is more powerful than techniques such as GERT, which are basically time and cost oriented. VERT has been successfully utilized to assess the risks involved in new ventures and projects, in the estimation of future capital requirements, in control monitoring, and in the overall evaluation of ongoing projects, programs, and systems. It has been helpful to management in cases where there is a requirement to make decisions with incomplete or inadequate information about the alternatives. An example describing the application of VERT to an operational planning problem--the evaluation of electric power generating methods--is illustrated.

Venture planning and analysis for large-scale energy technology developments: A policy perspective

Venture analysis of a major energy R&D program involves a process whose objective is to provide insights into the policy question: “Should the government be in this particular energy-technology R&D business?” It is critical to recognize the broader policy formulation and analysis process within which venture analysis seeks to provide insight. Although several venture evaluation approaches have been suggested which incorporate multiattribute decision criteria, they suffer from either: a) the weakness of collapsing the various dimensionally incompatible decision criteria (monetary, environmental, energy, etc.) into a single index or numeraire; or b) they fail to take decision criteria other than energy and dollars into account at all. Both approaches are inadequate for affective venture analysis. The “portfolio problem” of multiple competing/interacting energy-technology options at the policy-decision level suggests that venture analysis results for specific technologies should be provided with complete assessments of various relevant decision criteria in their original (and most appropriate) metrics. Costs and benefits measured in dollars, ergs, environmental damage units, plant safety units, and so on should not be collapsed into a single ranking or evaluation criterion at the venture analysis stage. To do so will totally muddle and confound the higher-level portfolio policy-decision process which compares the effects of multiple energy-technology developments and alternative wealth distribution and implementation approaches. It should be noted, moreover, that while this paper has focused on the specific policy-level issues of R&D venture analysis for energy technologies, it appears that this methodology may be appropriate for a variety of public-policy decisions. Certainly most of the notions presented could be usefully applied to other public sector R&D efforts. Additionally, however, many of the concepts apply to non-R&D policy decisions where the emphasis is on the selection of a unified, time-phased program from a range of possible alternatives.

A Proposed System for New Venture Evaluation

(1964). A Proposed System for New Venture Evaluation. Research Management: Vol. 7, No. 6, pp. 437-438.