How are venture capital companies structured?

Venture capital decision criteria


1. term: Venture capital decision criteria are the decision criteria considered for the selection of a start-up project, which play an important role especially for investors of venture capital.

2. Expressions: The venture capital decision-making criteria can essentially be summarized in five groups. The first group summarizes the aspects that make up the company's business model. These include, on the one hand, criteria related to the product and the market such as market size, market growth and the uniqueness and market acceptance of the product (Unique Selling Proposition), and on the other hand, the assessment of the individual value-added activities that may create an advantage (e.g. a new production technology) and the assessment the overall value creation configuration (e.g. the question of what is bought in and what is not) and, thirdly, the analysis of the company's earnings mechanics. Particular attention must be paid to the durability of the competitive advantage, e.g. in the case of technology-oriented companies, the existence of patents or other property rights. The other groups include the characteristics of the management team (management) with regard to competencies, track record and ability to work together, questions of industry and the intensity of competition, financial criteria such as return and risk as well as the general requirements and criteria of the fund. The business plan itself is also an important basis. A high-quality and formally correct business plan is also regularly seen as a prerequisite for an investment. However, the business plan is mainly a basis for arriving at an assessment with regard to the criteria listed above in the course of the investment phases.

3. Order of precedence: As a rule, particular importance is attached to the assessment of the skills and personal characteristics of the entrepreneur or start-up management. However, a clear ranking of all these criteria has so far been lacking because the importance of the decision fluctuates with the perspective taken and the investment phase considered. For example, venture capital companies (VCG) seem to use the characteristics and skills of start-up management in advance to assess a venture, and secondarily then market size and growth as well as the financial side with the expected return. From an ex-post perspective, which rather highlights the success factors of the start-up companies, in addition to the quality of the management team, the market acceptance of the product and protection options against the competition seem more important. Another picture emerges when looking at the investment phases. In the screening phase, the VCG's requirements for an investment, such as the investment volume, the start-up company's sector, the financing phase and also the geographical location, which result from the investment strategy set out in the articles of association for investors, serve as exclusion criteria must be fulfilled. In the further evaluation, the other criteria related to the quality of the company come to the fore. They follow less an exclusionary than a compensatory principle.

4. Problems: Problems arise both in determining the relevant decision criteria and in their application. In addition to other methodological difficulties in determining the criteria used by VCG, there are, for example, doubts as to whether VCG have deliberately penetrated their own decision-making process. Venture capitalists seem to have insufficient precision in the introspection of the decision criteria they use and tend to overemphasize the least important criteria when justifying their decision. On the other hand, there are indications that both inexperienced and very experienced venture capitalists are less reliable and effective in their decisions than moderately experienced venture capitalists. In the case of inexperienced venture capitalists one reason may be the inadequate structuring of the flood of information, very experienced venture capitalists, on the other hand, seem to rely more and more on automatisms and acquired intuition, which lead to bias and incorrect assessments.

From the "Gabler Kompakt-Lexikon Entrepreneurship: Look up, understand, apply 2,000 terms". The Gabler compact encyclopedia company start-up offers over 2,000 current definitions of terms on the topics of start-up planning / process / management, business models / concepts / development as well as corporate finance and funding programs. Editor Professor Dr. Tobias Kollmann is a recognized expert for all questions relating to business start-ups and development. The target group of the lexicon are company founders, start-up consultants, venture capital companies, investment managers, business consultants as well as students and lecturers in economics at technical colleges and universities. Order now from amazon