Does entrepreneurial experience affect investment decision making of a venture capitalist?

Does entrepreneurial experience affect

investment decision making of a venture

capitalist?

Master Thesis

Master of Science: Entrepreneurship

Author: Thomas Borchers

Student number VU: 2588601

Student number UVA: 11429224

Email: t.borchers@student.vu.nl

thomas.borchers@student.uva.nl

Coordinator: Dr. Nazlihan Ugur

Abstract

This thesis extends research studying decision making of venture capitalist’s (VC). A

contribution is made to this literature by investigating the influence of entrepreneurial

experience on VCs decision making. Conducting a qualitative choice experiment among 7

VCs with and 7 VCs without entrepreneurial experience, led us to build a theoretical model of

entrepreneurial experience and the decision factors favored by VCs. VCs with entrepreneurial

experience tend to favor investment proposals with better markets, while VCs without

entrepreneurial experience tend to favor investment proposals with better products or ideas.

Findings highlight that the type of non-pecuniary benefits offered by the VC, and the

investment focus of the venture capital firm explain why decision factors are emphasized by

VCs. The implications of these findings for research and practice are outlined.

Key words: venture capital, decision making, entrepreneurial experience, and decision

factors

Acknowledgement

Hereby, I would like to present my final master thesis, the end of my master program

Entrepreneurship at the University of Amsterdam and at the VU University. The last 4

months, in which I have been working on my master thesis, have been a great learning

experience.

First, I would like to thank my thesis supervisor Dr. Nazlihan Ugur. She provided me with

guidance, feedback, and support throughout the research process. All the meetings and

conversations, used to discuss questions, contributed to a more rigorous study. Furthermore, I

would like to thank the 14 venture capitalists who made time in their busy schedules to speak

with me. I am thankful for their open and comprehensive answers to my questions as well as

for the pleasant conversations. I enjoyed it greatly to learn about their experiences and their

investment decisions.

The copyright rests with the author. The author is solely responsible for the content of the

thesis, including mistakes. Universities cannot be held liable for the content of the author’s

thesis.

Thomas Borchers

Amsterdam, July 2017

Table of content

Abstract

2

Acknowledgement

3

1. Introduction

6

2. Literature review

11

2.1. Venture Capital

11

2.1.1. Venture Capital definition

11

2.1.2. Venture Capitalists and Business Angels

12

2.1.3. The Venture Capital Firm

13

2.2. The decision process

14

2.2.1. Stages of the decision process

14

2.2.2. Selection criteria

16

2.2.3. VCs mental model

18

2.3. The role of experience

19

2.3.1. The influence of human capital

19

2.3.2. Entrepreneurial experience of VCs

19

2.3.3. Entrepreneurial experience and investment decisions

20

2.2.4. Expectations VCs with and VCs without entrepreneurial experience

22

3. Method

23

3.1. Research design

23

3.1.1. Type of design

23

3.1.2. Research approach

23

3.2. Sample and data collection

24

3.2.1. Sample selection

24

3.2.2. Collection of data

26

3.3. Research context and boundaries

28

3.4. Data analysis

28

3.4.1. Inductive coding

28

3.4.2. Concept development

29

3.4.3. Quantifying the choice experiment

30

3.5. Actions to improve rigor

31

4. Findings

32

4.1. A model for the effect of entrepreneurial experience on VC decision making

32

4.2. Descriptive analysis

33

4.2.1. Experience VCs

33

4.2.2. Characteristics VCF

34

4.3. Findings VC decision factors

34

4.3.1. Decision factors total group

34

4.3.2.

Decision factors

ENT-VCs

39

4.3.3.

Decision factors NO-ENT-VCs

41

5. Discussion

47

5.1. The effect of entrepreneurial experience on VC decision making

47

5.2. Theoretical contribution

49

5.3. Practical contribution

51

5.4. Limitations and future research

52

6. Conclusion

53

References

54

Appendix

61

Appendix A:

List of Dutch VCs

61

Appendix B:

Invitation email

68

Appendix C: Legend of data sources

69

Appendix D: Interview guide

71

Appendix E: 1st order category development

75

Appendix F: Data structure

83

Appendix G: Structured transcription report

89

Appendix H: Notes and synthesis

137

List of figures and tables

Table 1:

Participants of the study

25

Figure 1:

A model for the effect of entrepreneurial experience on VC decision making

32

Table 2:

Mean, standard deviation (SD), minimum (MIN), and maximum (MAX) of variables 33

Table 3:

Options chosen and factors favored by VCs

35

Table 4:

Weighted averages for factors favored by VCs

36

Table 5:

Ranking of factors by VCs

36

1. Introduction

This thesis sets out to determine the influence of entrepreneurial experience on the investment

decision making process of a venture capitalist (VC). The importance of venture capital has

been recognized in various studies, as it increases firm survival chances

(Sahlman, 1990)

,

innovation (

Kortum & Lerner, 2000)

, economic development, and job creation (

Li & Zahra,

2012).

Venture capital investors provide capital and non-pecuniary support to receive partial

ownership or equity of a company. Companies that are predominantly in the

seed, start-up, or

growth phase (Hellmann & Thiele, 2015). Business angels and VCs are the two most known

venture capital providers (Elitzur & Gavious, 2003). What distinguishes the two is that

business angels are high net worth individuals who invest their own money, while VCs

operate on behalf of a firm and most of the time represent limited partners e.g. banks, pension

funds, governments, and insurance companies (Mason & Harrison, 2002). The current study

focuses on VCs rather than business angels, as VCs invest as their primary business (Elitzur

& Gavious, 2003), have more investment experience (Van Osnabrugge, 1998), and have a

better investment performance (Mason & Harrison, 2002). Although VCs perform diverse

activities such as fundraising, generating a deal flow, assessing investment opportunities,

negotiating deal structures, assigning managers, building partnership, and developing an exit

strategy, the main activity is screening prospective investments

(Franke, Gruber, Harhoff &

Henkel, 2008). Assessment of investment opportunities is so important, as VCs who are better

at screening, will more likely generate sufficient returns (Dimov & Shepherd, 2005).

Current literature has shown great interest in the phases of the decision process

(Fried

& Hisrich, 1994), and the criteria used to screen investment opportunities (Hall & Hofer,

1993;

MacMillan, Siegel & Narasimha, 1985; Muzyka, Birley & Leleux, 1996). The prime

criteria groups used for multi-stage screening are personality and experience of the

entrepreneur, product characteristics, market characteristics, and financial characteristics

(Block, De Vries, Schumann & Sandner, 2014; Dhochak & Sharma, 2016; Kollmann &

Kuckertz, 2010; Petty & Gruber, 2011; Woike, Hoffrage & Petty, 2015). Recent research

suggested that market characteristics are key criteria, since they serve as a driver for the

success of other criteria groups (Dhochak & Sharma, 2016). Despite the interest in the phases

of the screening process and the criteria used, the cognitive process is also an important aspect

in VC decision making

(Zacharakis & Shepherd, 2001). Decision makers use their own

mental model

(Johnson-Laird, 1983)

to select, couple, and assess information cues (

Spence &

Brucks, 1997). Mental models are refined when individuals gain more experience (Lurigio &

Carroll, 1985). Human capital significantly affects this cognitive process of VCs, as work of

VCs is more centered around human capital than financial activities

(

Smart, Payne & Yuzaki,

2000). Entrepreneurial experience, a part of human capital (Pennings, Lee & Van

Witteloostuijn, 1998), is essential for VCs as it contributes to the understanding of the

challenges of portfolio companies, and it reduces high agency risk (

Patzelt, zu

Knyphausen-Aufseß & Fischer, 2009).

A considerable amount of literature has been published on entrepreneurial experience

of the VC and performance. Research highlighted how entrepreneurial experience of a VC

affects raising funds (

Walske & Zacharakis, 2009)

, correctly assigning managers

(Bottazzi,

Da Rin, & Hellmann, 2008)

, and achieving liquidity through a strategic exit (

Dimov &

Shepherd, 2005;

Zarutskie, 2010). Despite these findings, far too little attention has been paid

to the influence of entrepreneurial experience on the decision process of a VC. It is suggested

that VCs with entrepreneurial experience favor more early stage investments (Patzelt et al.,

2009), but have a negative attitude towards academic spin offs

(Knockaert, Wright, Clarysse

& Lockett, 2010). These studies only examined the alignment between the venture capital

firm (VCF) and the emerging business (Fried & Hisrich, 1994). With regard to screening

criteria, VCs with entrepreneurial experience prefer to invest in entrepreneurs that have

similar human capital (Franke, Gruber, Harhoff & Henkel, 2006), but do not prefer to invest

in startups that hold a patent (Knockaert, Huyghe & Clarysse, 2014). Again, other criteria

groups are not examined, and the aforementioned studies examined relationships that are only

a small part of the overall investment decision process.

As previous work experience explains

differences in opportunity identification (Sutcliffe, 1994), and the decision process of VCs

(Shepherd, Zacharakis & Baron, 2003), it is valuable to know if entrepreneurial experience

influences this overall process.

Knight (1994) suggested that the same selection process and the same selection criteria

are used by VCs, but according to Woike et al, (2015), this does not mean that VCs rely upon

information the same way and apply the same decision making strategies. Synthesis on

findings by

Zacharakis, McMullen and Shepherd (2007), who indicated that criteria

emphasized is based on institutions in which the VC operates, and findings by

Harrison,

Mason and Smith (2015), who highlighted that investment experience influences the selection

criteria emphasized, leads to believe

that VCs with and VCs without entrepreneurial

experience emphasize different criteria. It has been expected that both type of VCs put much

emphasis on the market characteristics, since it serves as the driver criteria

(Dhochak &

Sharma, 2016)

, and VCs invest in industries due to the sufficient returns. VCs do not invest

solely in good entrepreneurs or good ideas (Zider, 1998). Financial characteristics are

perceived as heavily dependent on other criteria

(Dhochak & Sharma, 2016)

, thus it is

predicted that financials receive less attention by both type of VCs. Furthermore, it is

anticipated that VCs with entrepreneurial experience put more emphasis on the entrepreneur

and the product, as these VCs have entrepreneurial experience themselves, and are more often

perceived as product builders (Stam & Wennberg, 2009). Lastly, it is expected that VCs

without entrepreneurial experience put more emphasis on market and financials, as VCs with

consultancy and corporate finance backgrounds have strong analytical skills and knowledge

about markets and finance (Shefrin, 2001).

So, the goal of this research is to determine, by examining the type information

emphasized, if the overall decision process of a VC is influenced by entrepreneurial

experience. Franke et al. (2008) also pointed out that it is important to know how the

experience of a VC affects the overall investment decision. This research will therefore

contribute to the understanding of the underlying mechanisms of the VCs decision process, a

process that

VCs do not even completely understand themselves (Woike et al., 2015). A better

understanding of the nature behind certain investment decisions will lead to better decision

making, what will more likely lead to maximized financial returns (Dimov & Shepherd,

2005). In order to address the issue of a better understanding of the overall investment

decision process, the following research question is formulated that will constitute the focus

of this study:

Does entrepreneurial experience influence the decision making process of VCs?

In order to answer the main question, the following sub questions need to be answered:

1. How does experience influence the decision process of VCs?

2. Which selection criteria do VCs with entrepreneurial experience emphasize?

3. How does the overall investment decision process of VCs with and VCs without

entrepreneurial experience compare?

4. How is the comparison between both type of VCs explained?

The conducted research tackles these questions by adopting a qualitative research approach.

Literature about entrepreneurial experience and the influence on VC decision making is still

in a nascent stage, so the correct methodological fit was a qualitative approach (Edmondson

& McManus, 2007), that can be used for theory building (Eisenhardt & Graebner, 2007).

Dimov, Shepherd and Sutcliffe (2007) suggested that too much

research on VC decision

making has emphasized commonalities, rather than differences. Therefore, this study used

cross-case analysis, that provided rich and holistic understanding (Yin, 2013), to examine the

differences between VCs with and VCs without entrepreneurial experience. Furthermore, the

conducted case analysis, used for theoretical reasoning, was the preferred analysis approach,

as studies suggested that VC decision making should be studied more

in-depth (

Patzelt et al.,

2009; Petty & Gruber, 2011). Collection of data was done by doing 14 semi-structured

interviews with Dutch VCs. A focal element of the semi-structured interview was the choice

experiment with investment scenarios that provided insights into the relative importance of

decision factors. VCs had to choose between two investment opportunities, and had to explain

why they preferred certain options. Options chosen and the argumentation for that option

provided insights into which of the 4 decision factors (entrepreneur, product, market, and

financials) are more important and why. Answers from the choice experiment were quantified

by calculating the weighted averages for data analysis. Additionally, a systematic approach to

concept development was followed (Gioia, Corley & Hamilton, 2013) that revealed core

themes such as investment focus, career VC and decisions factors emphasized. Following

these actions for data analysis facilitated building a theoretical model that illustrates how

entrepreneurial experience influences VC decision making.

The developed theoretical model demonstrates that VCs with entrepreneurial

experience emphasize different criteria than VCs without entrepreneurial experience.

Contrary to expectations, VCs with entrepreneurial experience tend to put more emphasis on

market characteristics, while the VCs without entrepreneurial experience put more emphasis

on product characteristics. This unexpected result is due to the non-pecuniary benefits the VC

is able to offer to the investment opportunity, what is different for each VC (Gompers,

Kovner, Lerner & Scharfstein, 2006), and is determined by the human capital of the VC

(

Luukkonen, Deschryvere & Bertoni, 2013). Findings indicate that VCs with entrepreneurial

experience offer non-pecuniary benefits by improving the product, and therefore favor a

better market, while VCs without entrepreneurial experience offer non-pecuniary benefits by

finding the correct niche markets, and therefore favor a more unique product. Although it is

not the most important factor for both type of VCs, the factor entrepreneur is slightly more

important for VCs with entrepreneurial experience. A possible explanation for this finding is

the similarity bias VCs suffer from

(Franke et al., 2006), but results also highlight that

investment focus of the VCF influences the emphasis on this decision factor. The investment

focus of the VCF is therefore included in the theoretical model as well. Finally, both type of

VCs put least of the emphasis on the financial characteristics, which is in line with findings

from

Dhochak and Sharma (2016), as financial characteristics are a reflection of other criteria.

The previous described findings are important for the VC literature, as previous

studies, who examined experience of the VC and the factors emphasized, solely focused on

how the entrepreneur and the founding team is evaluated (Franke et al., 2006; Franke et al.,

2008). Insights into the differences between VCs regarding factors emphasized, such as

market, product, entrepreneur, and financials, provide a more holistic view in how

entrepreneurial experience affects VC investment decisions. Second, when the integration of

factors is analyzed, the study should control for entrepreneurial experience by the VC. What

is perceived as most important and as driver criteria differs per type of VC, a condition not

controlled for by Dhochak and Sharma (2016). Third, decision factors emphasized vary per

institution (

Zacharakis et al., 2007). Again, research should control for the difference in

entrepreneurial background of the VCs when examining institutions,

since the standards for

becoming a VC and the typical background of a VC may differ per institution. Although

Patzelt et al. (2009) highlight that VCs with entrepreneurial experience invest in earlier

stages, this study indicates that the industry focus of the VCF determines investment stage.

Industry focus should be taken into account when analyzing the influence of entrepreneurial

experience of the VC on the preferred investment phase. In practice, VCs can use the findings

from the current study to better understand the nature of their decisions. It enables VCs to

adjust their decision process, since they know how VCs with entrepreneurial experience favor

different factors. An adjustment that can result in more rigorous assessment and what is likely

to increase decision making and generation of sufficient returns (Dimov & Shepherd, 2005).

Assessment of investment opportunities should also be done by VCs with and VCs without an

entrepreneurial background, which leads to valuable attention for all decision factors.

Entrepreneurs who seek funding should take the entrepreneurial background of the VC into

account. When the entrepreneur knows the strengths of the business proposal, knows what

non-pecuniary benefits the VC offers, and sends the proposal to the fitting VC, the

entrepreneur is more likely to receive the needed funding.

The remainder of this research has been organized in the following way. Literature

review will provide an overview of relevant theoretical concepts and will state the theoretical

expectations. Then methodology and data will be described, followed by the insights gained

from the data, and the resulting theoretical model of propositions. Finally, an answer to the

research question, implications, and suggestions for future research are presented.

2. Literature review

2.1. Venture capital

Venture capital, which is a form of funding for entrepreneurial ventures, boosts the growth of

entrepreneurial firms (

Davila, Foster & Gupta, 2003). Although the number of failing startups

is high, startups backed by venture capital have a higher chance of surviving than startups that

lack venture capital (Sahlman, 1990)

. Venture capital does not only increase the chance of

organizational success, but it is also an incitement for venture creation, innovation (

Kortum &

Lerner, 2000), economic progress, and job creation (Bottazzi et al., 2008; Li & Zahra, 2012).

2.1.1. Venture capital definition

Venture capital increases the number of high growth firms, but what does this term represent?

Clarification of the term is needed, since the term is used differently in various institutions

and countries (

Jeng & Wells, 2000). Amit, Brander and Zott (1998) indicate that venture

capital is a part of private equity investing, funding by investors that get ownership or equity

of a company. Most of these investments are made in privately held companies. Investors take

on an active role in these companies, as investors want to increase the value of the firm to

eventually harvest the investment. However, the words venture capital and private equity get

mixed up, which leads to a lack of consensus. A lack of consensus regarding a general

definition is acknowledged in various studies about venture capital (Amit et al., 1998; Naqi &

Hettihewa, 2007). Although venture capital is part of private equity investing, venture capital

investors and private equity investors differ. Private equity investors focus on management

buy-outs, leveraged buy-outs and the later stage of the business life-cycle (Bertoni, Ferrer &

Martí, 2013). Venture capital investors focus on an early stage (seed, start-up, and growth) of

the business life-cycle. In Europe the term venture capital is sometimes used for the later

stage investments, but the term should correspond with the US definition of early stage

investments

(

Jeng & Wells, 2000). Therefore, buy-outs and late stage investments should be

excluded from the venture capital definition. This is in line with the venture capital definition

by Black and Gilson (1998, p. 245): ‘‘investment by specialized venture capital organizations

in high-growth, high-risk, often high-technology firms that need capital to finance product

development or growth and must, by the nature of their business, obtain this capital largely in

the form of equity rather than debt’’. While a variety of definitions of the term venture capital

have been suggested, this research will use the definition by Black and Gilson (1998), as it

describes the type of investor, the type of investment, the risk that comes along with the

investment, the stage of the investment, and where the investment is used for.

2.1.2. Venture Capitalists and Business Angels

The two most common providers of venture capital are business angels and VCs (Elitzur &

Gavious, 2003). Business angels are high net worth individuals who invest their own money

in entrepreneurial ventures. VCs also serve as financial intermediaries for startups, but VCs

represent limited partners, manage an investment fund, and operate on behalf of a firm

(Mason & Harrison, 2002). There are numerous of differences between business angels and

VCs (Van Osnabrugge, 1998), e.g. experience of investor, size of investment, how due

diligence is conducted, the number of investments made, stage of funding, expected rate of

return, and board involvement. The main difference, according to Elitzur and Gavious (2003),

is that VCs are organized as a firm, whereas business angels act on their own. A second

difference is that business angels invest in the seed stage of the business life-cycle and VCs in

the late growth stage. VCs have been shifting their investments to later growth stages due to

the uninspiring returns (Mulcahy, 2013). In pursuit of higher returns, VCs reduce risk by

investing in later growth stages, since the emerging business has more proof of concept.

Another key distinction, what makes later stage investments possible, is that VCs have a

higher amount of available funding (Hellmann & Thiele, 2015). Business angels have limited

funds, since they solely invest their private capital. VCs have sufficient funds for late stage

investments, as VCs mostly raise their funds via large financial institution e.g. banks, pension

funds, governments, and insurance companies (Mason & Harrison, 2002). The amount of

funding and stage of funding is used by various empirical studies to distinguish business

angels and VCs (Goldfarb, Hoberg, Kirsch & Triantis, 2009; Hellmann, Schure & Vo, 2015).

Mason and Harrison (2002) demonstrated that the investment performance by business

angels is less than the investment performance by VCs at a VCF. A first explanation for this

finding is that VCs invest capital of limited partners. Therefore, VCs have to invest with care,

as the limited partners demand a required rate of return on the investment (Zong, 2005).

Investment capacity is a second reason why VCs may outperform business angels. VCs

provide more funding, and are able to provide follow-on capital. This will decrease the chance

of undercapitalization, and therefore increase the chance of organizational success, which

contributes to sufficient returns for the investor (Swamidass, 2013). The last argument that

supports the finding of Mason and Harrison (2002) is that VCs have more investment

experience than business angels (Van Osnabrugge, 1998). Business angels have made 4

investments on average, while VCs have made 23 investments on average. Moreover,

business angels manage a portfolio of approximately 2 investments, while VCs manage a

portfolio of 10.3 investments. Although business angels have less experience in investing,

business angels have more experience as entrepreneur. Entrepreneurial experience, which is

mostly constrained to a specific industry, lowers the exposure to market risk for investors

(Fiet, 1995). Yet in practice, business angels invest in industries where they do not have this

specific experience, and therefore do not use entrepreneurial experience to their advantage

(Kelly & Hay, 1996).

This research will focus on the VCs instead of the business angels, as VCs have more

experience (Van Osnabrugge, 1998), invest as their primary business (Elitzur & Gavious,

2003), and have a higher investment performance (Mason & Harrison, 2002). Furthermore,

VCs operate on behalf of a firm, which corresponds with the venture capital definition of

Black and Gilson (1998). This definition implies that an investment is made by a specialized

venture capital organization. However, what does this specific organization do?

2.1.3. The Venture Capital Firm

VCFs raise capital by assembling investments from limited partners in a venture capital fund

(Walske & Zacharakis, 2009). In the beginning of venture capital these limited partners were

high net-worth individuals, but nowadays they are pension funds, endowments, and other

institutional investors that serve as limited partners

(Gompers & Lerner, 2004). VCs will

manage the gathered fund, and will invest capital in entrepreneurial companies.

The limited

partners have no operational tasks, and take on a passive role in the investment process.

To

reduce agency conflicts between VCs and limited partners, contractual provisions are

established in a limited partnership agreement

(

Metrick & Yasuda, 2011).

So the VCs invest capital out of the raised fund in entrepreneurial companies, that are

also called portfolio companies (Metrick & Yasuda, 2010). VCs offer non-pecuniary benefits

to the ventures they invest in, by offering their own set of capabilities (Gompers et al., 2006).

According to Sapienza, Manigart, and Vermeir (1996), VCs with operating experience in the

focal industry of the ventures, will make significantly more non-pecuniary contributions. In

return for the investment and the non-pecuniary benefits, the VC will receive a share of the

profits. The share of the profits that the VC receive is called carried interest, and is around

20%, the other 80% will go to the limited partners (Barry, 1994). In order to realize a

sufficient return on investment (ROI), normally a 10x payout,

the VC tries to trigger a

liquidity event through a strategic exit e.g. a management buy-out, or an initial public offering

(IPO) (Norton, 1995).

When the expected return is paid back to the principal, the venture

capital fund will mature

. If funds mature, VCFs will try to raise new funds (Gompers, 1996).

Dimov and Shepherd (2005) argue that it is possible to make a

distinction between

pre-investment activities and post-investment activities.

Pre-investment activities entail

fundraising, generating a deal flow, assessment of investment opportunities, conducting due

diligence to determine the potential of an investment opportunity, and negotiating a sufficient

deal structure. Post-investment activities of a VCF are assigning managers, providing

follow-on capital, and building strategic partnerships. According to Bottazzi et al., (2008)

,

non-pecuniary assistance is offered by monitoring, supporting, and controlling.

It is common for

VCs to take on a board seat within the board of directors of the entrepreneurial firm. A board

seat will give the VC more control, and the VC can give strategic, operational, and managerial

advice (Pinch & Sunley, 2009). In order to achieve liquidity, the VCF must also develop an

exit strategy (De Clercq, Fried, Lehtonen & Sapienza, 2006). Although VCFs have diverse

activities, opportunity assessment is the main activity (Franke et al., 2008). Screening

prospective investments is essential, as it serves as an antecedent for investment success

(

Zacharakis & Meyer, 2000). The decision process of a VC is a pivotal area of research within

the literature of venture capital and startup funding (

Dimov et al., 2007;

Walske &

Zacharakis, 2009

). Understanding this topic is crucial for VCs, as VCs who are better at

screening prospective investments will more likely receive sufficient returns (Dimov &

Shepherd, 2005).

2.2. The decision process

2.2.1. Stages of the decision process

To improve understanding of the decision process it is better to break the process down into

different stages (Maxwell, Jeffrey & Lévesque, 2011). VCs use multi-stage screening as an

evaluation process, as it reduces information asymmetry between the investor and the

entrepreneur, and it helps to identify investment opportunities that are actually worthwhile

(Woike et al., 2015). Fried and Hisrich (1994) studied the entire investment process by using

a two stage research methodology, including case-study data and an industry panel. With their

study, they developed a venture capital process model that consists of six stages. A brief

explanation of the six stages is given below.

(1) Origination. The first phase of the decision process is origination. The emphasis of

this phase is on the deal flow and where the proposal comes from. VCs rely upon referrals,

e.g. limited partners, managers of portfolio companies, consultants, and bankers, for deal flow

(Zhang, 2011). Proposals that the VC receives via referral have a much higher chance of

being funded, than the unsolicited proposals.

(2) Venture capital firm-specific Screen. This is a specific stage of screening, as VCFs

only evaluate proposals that adhere to a specific deal size, stage of funding, geographic

location, and industry. For instance, a different stage may not have the proper risk-return

balance for the investor. However, prior entrepreneurial experience of the VC can mitigate

this risk, due to the non-pecuniary assistance of the VC (

Dimov et al., 2007).

Nonetheless, the

investment opportunity must have a fit with the broad interest of the VCF, otherwise the

opportunity will immediately be rejected (Wiltbank, Sudek & Read, 2009).

(3) Generic Screen. Many deals will pass the venture capital firm-specific screen, but

will be rejected in the generic screen (Fried & Hisrich, 1994). The VC will evaluate the

investment opportunity using general criteria, e.g. concept, management, and return. How

rigorous the VC analyses the proposal is dependent on the origination of the deal. Once a deal

comes via a referral, the VC will screen less strictly. The intention in the screening phases is

to reject as many unacceptable deals, while spending as little time as possible (Bliss, 1999).

(4) First-Phase Evaluation. In this phase the VC will gather and analyze additional

information to see if investing is rewarding. Main activities of the investor, according to Fried

and Hisrich (1994), are interviewing members of the management team, touring facilities,

contacting former co-workers, and contacting other outside investors. The VC will compare

the outside information with the data that the entrepreneur provided. VCs want to get a feeling

for the price per share and the structure of the deal. If the VC will not receive a sufficient

return due to high share prices, the VC does not want to spend any more time on the

investment opportunity.

(5) Second-Phase Evaluation. In this phase the goal of the VC changes from validating

the opportunity to identifying the obstacles and the solutions to these obstacles. Before going

to the second phase, the VC needs to have a good understanding of the deal and the price per

share. The second evaluation phase is characterized by a substantial increase in time spend on

the investment opportunity (Bliss, 1999).

(6) Closing. A binding agreement needs to be signed in the closing phase. Investors

and entrepreneurs spend large amounts of time to reach this final phase, but 20% of the deals

will still not be funded (Fried & Hisrich, 1994). The last three stages are hard to distinguish

for VCs and entrepreneurs due to possible overlap.

screening stages. However, the identified stages differ per study. Other studies indicate that

there are only two phases in the decision making process, the screening phase and the due

diligence phase (Maxwell et al., 2011; Petty & Gruber, 2011; Zacharakis & Shepherd, 2001).

The first three phases described by Fried and Hisrich (1994) are part of the screening phase

and the last three phases are part of the due diligence phase. Wiltbank et al. (2009) described

four phases in the investment decision process, initial screening, formal analysis, due

diligence, and negotiation. These phases partly overlap with the six phases previously

described. Although studies describe other phases, the venture capital process model by Fried

and Hisrich (1994) is leading within the literature, as it was more rigorously investigated.

2.2.2. Selection criteria

Another part of the decision process is the criteria used to screen the investment opportunity

(Svenson, 1979). The selection criteria are seen as a screening tool for VCs, to evaluate

market uncertainty and information asymmetry (Streletzki & Schulte, 2013). A large number

of studies about venture capital decision making have focused on the criteria used in the

evaluation process (

Franke et al., 2008;

Hall & Hofer, 1993;

MacMillan et al., 1985; Muzyka

et al., 1996). This area of research is important as it helps entrepreneurs, who seek funding, to

better understand their proposal and the fatal flaws in their proposal. It provides VCs a total

overview of the criteria used in the screening process (

Franke et al., 2008). Furthermore, VCs

are seen as experts in recognizing high potential firms, so the selection criteria are regarded as

key success factors for start-ups (

Shepherd & Zacharakis, 2002). Woike et al. (2015)

explained that this area of research is popular due to the benefits venture capital brings for

emerging businesses.

Literature suggests that a wide variety of evaluation criteria is used by VCs (

Franke et

al., 2008). Up to 400 different criteria can be used in the due diligence phase

(Kollmann &

Kuckertz, 2010). Yet, based on several studies, the main criteria can be grouped into 5

groups: personality of the founder, experience of the founder, product or service, market or

industry, and financials (Block et al., 2014; Dhochak & Sharma, 2016; Kollmann & Kuckertz,

2010; Petty & Gruber, 2011; Woike et al., 2015). To give a complete overview, the main

groups are described in more detail.

(1) Personality of the founders consists of leadership quality, commitment, and VC

character (Kollmann & Kuckertz, 2010). The entrepreneur should have leadership qualities, as

it contributes to leading people towards a common goal (Arham, Boucher & Muenjohn,

2013). Commitment, the second criterion, is one of the most important assets for competitive

advantage (Erikson, 2002). The last criterion, VC character, is that the entrepreneur is suitable

for venture capital, and is pursuing rapid growth. Personality of the entrepreneur is so

important for VCs, as VCs believe that extraordinary entrepreneurs can even turn ordinary

ideas into a success (Dhochak & Sharma, 2016). Since investors care about maximizing

financial returns, the VC will only invest in an entrepreneur with a sufficient personality, as

the right personality increases chances of success and return.

(2) Experience of the entrepreneur entails the track record of the founder, technical

expertise, and business knowledge (Flynn, 1991; Franke et al., 2006). Entrepreneurs with

experience (e.g. industry experience, management experience, founding experience) will

receive higher valuations from VCs (Ge, Mahoney & Mahoney, 2005). Entrepreneurial

experience by the founder contributes to the performance of the new venture (Stuart & Abetti,

1987), which will more likely yield sufficient returns for the investor. That is why a VC will

favor an entrepreneur with relevant experience over an entrepreneur without relevant

experience in the investment decision process.

(3) For product or service the VC applies criteria such as innovativeness of the

offering, the protection of the offering, and the unique selling proposition of the offering

(Khan, 1987). The product or service should meet the aforementioned criteria to have a

competitive advantage in the market (Tyebjee & Bruno, 1984). A product with a competitive

advantage has more growth potential, what makes investing more appealing for the VC.

(4) Market or industry is another crucial factor in the screening process. Market size,

market growth, and market acceptance influence the investment decision (Mason & Harrison,

2002; Tyebjee & Bruno, 1984). An existing and growing market can be a predictor for the

revenue growth of a firm and value creation (Bachher & Guild, 1996). Revenue growth will

increase cash inflow of the firm, and enables the VC to realize the required rate of return.

(5) Factors that VCs analyze regarding financials are fit with financial strategy, return

on investment, capitalization cash flow, size of the investment, profitability, and exit strategy

(MacMillan et al., 1985; Muzyka et al., 1996). Investment proposals should fit with the

investment strategy of the VCF. Once there is no fit, the opportunity will be rejected. Exit

strategy is important as it enables the investor to realize a return. Investors already take the

exit strategy into account in the screening phases of the decision process (Mason & Botelho,

2016).

The previous mentioned criteria change in importance during the different phases of

the decision process. Petty and Gruber (2011) pointed out, by analyzing longitudinal data, that

criteria related to the product are more important in the early stage of the decision process,

and criteria related to financial evaluation is more important in the later stage. It seems

possible that these results are due to the change in uncertainty surrounding criteria during the

investment process. Kollmann and Kuckertz (2010) implied that information regarding the

entrepreneur is uncertain in the beginning, while information regarding profitability and

market acceptance will be more uncertain in the end of the investment process. This could

explain the focus on the financial criteria in the later stage. Although certain criteria will

receive more emphasis in different stages in the investment process, Dhochak and Sharma

(2016) indicated that research should not only look at the criteria as separate aspects, but also

at the interrelationship between the criteria. According to their findings, there are criteria that

affect others, and criteria that are affected by others. The key drivers are environment and

market characteristics, and all other factors are directly or indirectly associated with it.

Entrepreneur characteristics follows market characteristics as driver criteria. Exit strategy,

stage selection, and financial consideration are factors that are weak, thus heavily dependent

on drivers (e.g. entrepreneur characteristics, management skills, market choice, and product).

VCs should focus on the driver criteria in investment decisions. Zider (1998) also argued that

VCs invest in certain industries due to the possible returns, and not solely in good products or

entrepreneurs.

2.2.3. VCs mental model

Despite the strong interest in the selection criteria and the phases of the investment process

(

Woike et al., 2015)

, research should also focus on information processing in investment

decision making (Zacharakis & Shepherd, 2001). To make a judgment on an investment

opportunity a VC must select, couple, and assess information (

Spence & Brucks, 1997). The

mental model of a decision maker influences how information is processed. A mental model,

also referred to as cognitive schemata, represents the way information can be structured in the

mind of a decision maker. It helps to make interpretations of information cues through

abstraction (Johnson-Laird, 1983). A mental model is pivotal for cognitive activities such as

forecasting, explaining, and developing judgment (Larkin, McDermott, Simon & Simon,

1980). People possess multiple mental models, but the mental used is dependent on the

context of the situation (Ortony, 1977). If a VC is presented an investment opportunity with

familiar information cues, the VC will use a fitting mental model from long-term memory. If

unfamiliar information is presented, the VC will use another cognitive schemata. Mental

models are refined when decision makers acquire more experience, since experience makes a

mental models more complete and detailed (Lurigio & Carroll, 1985). More experienced

individuals learn about the importance of certain aspects in the decision process (Shepherd et

al., 2003). Therefore, with more experience, the VC will be more well-informed on which

criteria are important for successful investments.

2.3. The role of experience

2.3.1. The influence of human capital

Human capital is a construct that influences the mental model and the decision process of a

VC, as work of a VC evolves more around human capital than financial activities (

Smart et al,

2000). A definition of human capital of a VC is: ‘‘the knowledge and skills that VC managers

bring to the particular investment task they set out to perform’’ (Landström, 2007, p. 105).

Knowledge and skill of the VC is difficult to replicate, as human capital is tacit knowledge

(Dimov & Shepherd, 2005). The tacit nature of human capital makes it hard to create

proximal measures for this construct

(Bontis, 1998). Commonly used measurements for

human capital are

education level, education specialty, and working history (Zarutskie, 2010).

Entrepreneurial experience, which is defined as business ownership experience

(Odorici & Presutti, 2013)

, is part of human capital (Pennings et al., 1998). This is an

important aspect for VCs, as it contributes to understanding the challenges of portfolio

companies, and it reduces high agency risk (

Patzelt et al., 2009).

The way human capital is

defined is not consistent in entrepreneurial literature, which leads to disparate relationships

between entrepreneurial experience and the activities of VCFs (Bottazzi et al., 2008;

Dimov

& Shepherd, 2005; Walske & Zacharakis, 2009;

Zarutskie, 2010).

2.3.2. Entrepreneurial experience of VCs

Bottazzi et al., (2008) found in their research that human capital, in the form of prior business

experience, positively influences the activism of a VC in a portfolio company. Being more

active contributes to fundraising, assigning top-quality managers, and establishing a

relationship with a portfolio company. These non-pecuniary contributions will lead to an

increase in the performance of the venture. Due to

diverseness in human capital of VCs,

investment motives of VCs, investment stages of VCs, and the venture capital cycles used,

there is a great difference in how VCs offer non-pecuniary assistance to the portfolio

company (

Luukkonen et al., 2013).

The study of Bottazzi et al., (2008) however, measured

prior business experience by management and consultancy experience, and not by

entrepreneurial experience. Research, that did include entrepreneurial experience in the

human capital construct, demonstrated that different types of work experience influence the

ability to raise sufficient funds (

Walske & Zacharakis, 2009). Consulting and management

experience of a VC improves the ability to raise a sufficient fund, but entrepreneurial

experience decreases this ability. In the semi-structured interviews, limited partners indicated

that it is not a given that entrepreneurs who are good at spotting opportunities are able to

manage an investment fund and are able to diversify risk correctly. Thus, Walske and

Zacharakis (2009) demonstrated the negative effect of entrepreneurial experience for a VC.

Opposed to this negative effect is the positive effect pointed out by Dimov and Shepherd

(2005), who highlighted that entrepreneurial experience of a VC decreases the chance of

bankrupt portfolio companies. Although VCs with entrepreneurial experience have less strike

outs in their portfolio, they do not necessary have more companies that go IPO. Contradictory

to this finding,

Zarutskie (2010) found that VCs with management experience at startups have

more exits in their investment portfolio. These findings are due to the limited number of VCs

with this specific type of experience. The dependent variable of exits includes IPO’s and

merger & acquisitions, which could also explain the diverse findings.

Aforementioned studies provided diverse findings in regard to human capital and VCs.

Findings contradict as dependent variables vary.

Walske and Zacharakis (2009) focused on

raising sufficient funds, while

Bottazzi et al., (2008) focused on assigning top quality

managers. Furthermore,

Dimov and Shepherd (2005) pointed out that VCs with

entrepreneurial experience will not have more portfolio companies that fill for IPO, while

Zarutskie (2010) indicated that VCs with entrepreneurial experience have a higher exit rate in

their portfolio.

Dimov and Shepherd (2005) did argue that VCs with entrepreneurial

experience have less companies that go bankrupt in their portfolio. Findings are diverse with

respect to human capital in the form of previous experience and venture capital, but these

studies emphasized performance. So far, however, there has been little discussion about the

effect of entrepreneurial experience on the overall investment decision making of the VC.

2.3.3. Entrepreneurial experience and investment decisions

Patzelt et al. (2009) found that VCs with entrepreneurial experience focus on early stage

investment opportunities. Furthermore, VCs with entrepreneurial experience have negative

attitude towards investing in academic spin-outs

(Knockaert et al., 2010). An explanation for

this negative attitude is that VCs do not have a specific academic background, and therefore

have less affinity with the academic investment opportunities. These studies examined the

alignment between investor and the prospective investment, which is just the venture capital

firm-specific screen (Fried & Hisrich, 1994). The other phases of the decision process, and

the screening criteria are neglected. A study that did examine screening criteria claims that

VCs with entrepreneurial experience favor entrepreneurs with similar human capital (Franke

et al., 2006). Social psychologist Byrne (1997) gives an explanation for this finding, as people

rate others higher that are similar to themselves. Therefore, it can be expected that VCs will

also favor investment opportunities that have strong points that are similar to the strong points

of the decision maker. Although the study of Franke et al. (2006) highlighted how one factor

in the overall assessment of investment opportunities was affected by entrepreneurial

experience, the study did not highlight how factors such as product, market, and financial

characteristics are perceived different by VCs with entrepreneurial experience. Another

finding on entrepreneurial experience and VCs illuminated that entrepreneurial experience

negatively affects the attitude towards patents, as entrepreneurs have market knowledge that

is bounded to one industry (Knockaert et al., 2014). Patents are hard to evaluate when VCs do

not have explicit knowledge about the technology behind the patent. This will lead to more

information asymmetry, which fuels agency costs (Gompers, 1995).

One question that needs

to be asked, however, is whether

this finding also holds when the VC does have specific

knowledge about the technology? Altogether, the previous mentioned studies emphasized

only criteria like favoring a patent or certain human capital. Research has paid little attention

to entrepreneurial experience and the influence on the overall decision process of a VC.

This relationship is important, as one of the central questions within the literature of

investments is how the abilities of a VC affect the investment decision

(Fama, 1970). The

entrepreneurship research domain suggests that entrepreneurial experience positively

influences opportunity spotting (Fiet, 2007; Tang, 2010). However, when mangers are

presented with the same opportunity, does not mean that they perceive this opportunity the

same way (Sutcliffe & Huber, 1998). Previous work experience explains differences in

opportunity identification (Sutcliffe, 1994), and the decision process of VCs (

Shepherd et al.,

2003). Diversity in human capital will cause a difference in the evaluation of investment

proposals and in the identification of sufficient investment opportunities for each VC. Despite

this difference, VCs appear to use the same selection process and use the same screening

criteria across the world (Knight, 1994). But using the same criteria does not mean that VCs

rely upon information the same way and use the same decision making strategies (Woike et

al., 2015).

2.2.4. Expectations VCs with and VCs without entrepreneurial experience

Zacharakis et al. (2007) showed that the information cues emphasized by VCs are dependent

on the institution in which they operate. Additionally,

Harrison et al., (2015) indicated that

business angels with more investment experience favor investment fit, while nascent business

angels favor financial issues in the investment decision process. Although the study examined

business angels rather than VCs,

a synthesis of previous discussion points leads to believe that

VCs with entrepreneurial experience will emphasize different information cues in the

investment process than the VC without entrepreneurial experience. It is expected that both

VCs with and VCs without entrepreneurial experience put a lot of emphasis on market

characteristics, since VCs invest in industries for the expected returns

(Zider, 1998)

, and

market characteristics are perceived as driver criteria

(Dhochak & Sharma, 2016). As VCs

suffer from similarity bias (Franke et al., 2006), it seems more likely that the VCs with

entrepreneurial experience tend to put more emphasis on the entrepreneur and the product.

Entrepreneurs of high-tech companies are also characterized as product builders (Stam &

Wennberg, 2009), therefore VCs with entrepreneurial experience have more knowledge about

favorable entrepreneurial people and products. VCs with more consultancy and corporate

finance backgrounds have strong analytical skills and have knowledge about finance and

markets (Shefrin, 2001). Thus, it is expected that VCs without entrepreneurial experience put

even more emphasis on market characteristics, and more emphasis on financial

characteristics.

The information emphasized, and if the overall decision process is affected by

entrepreneurial experience should be examined more.

Although VCs are seen as experts in

screening investment opportunities, most VCs do not understand the underlying mechanisms

in their decision process (Woike et al., 2015). Understanding these mechanisms enables VCs

to master the overall decision making process. This knowledge will lead to better decision

making, and understanding of the nature behind investment decisions. VCs who are better at

deciding on whether to invest or not, are more likely to maximize financial returns (Dimov &

Shepherd, 2005).

Franke et al. (2008) also indicated that it may be fruitful to examine how

experience of a VC affects multiple aspects in VC decision making. These relationships need

to be measured in more detail and in more depth than has been done to date (

Patzelt et al.,

2009;

Petty & Gruber, 2011). Studying the relationship in more depth will highlight the

difference between VCs with and VCs without entrepreneurial experience. Differences in

decision making must receive more attention, as the current literature has mainly examined

the commonalities in VC decision making (Dimov et al., 2007).

3. Method

3.1. Research design

3.1.1. Type of design

In order to determine the correct research design for a certain topic, researchers should look at

the methodological fit (

Edmondson & McManus, 2007). This concept refers to internal

consistency of aspects in research. The proposed framework, by Edmondson and McManus

(2007), suggests that mature theory requires a quantitative research design, intermediate

theory can use a mix of quantitative and qualitative research design, and nascent theory

benefits from a qualitative research design. Given that little attention has been paid to

entrepreneurial experience and the influence on VC decision making, a qualitative approach

was employed to investigate this phenomenon. Eisenhardt and Graebner (2007) argue that a

theory building approach is needed when little is known about a subject. Qualitative research

approaches are used for theory building, while quantitative research approaches are used for

theory testing. Having the correct methodological fit, in this case a qualitative research

design, will lead to more rigorous findings

(

Edmondson & McManus, 2007).

3.1.2. Research approach

The qualitative approach chosen for this research was a multiple case study, as case studies

provide rich, holistic, and

contextual understanding (Yin, 2013). Rich understanding is

needed to address the lack of knowledge about the effect of entrepreneurial experience on the

decision process of a VC, and how VCs with entrepreneurial experience compare to VCs

without entrepreneurial experience.

Franke et al. (2008) recommended that the influence of

experience on

the decision process of a VC needs more investigation in future research.

This

was examined by conducting a multiple case study, instead of a single case study, as it

enabled replication logic

(Yin, 2013). Cross-case analysis gave insight for the comparison

between VCs with and VCs without entrepreneurial experience. These differences deserve

more attention in the literature, as research on VC decision making has emphasized

commonalities (Dimov et al., 2007). Rather than pursuing generalizability, this multiple case

study aimed for theoretical reasoning, serving as the basis for deep understanding of the

process and the basis for grounded theory development (Strauss & Corbin, 1990). Theoretical

reasoning provided the necessary contribution to the current literature, as multiple studies

suggest that deeper and more in-depth knowledge about the decision process of a VC is

desired

(

Patzelt et al., 2009;

Petty & Gruber, 2011).

3.2. Sample and data collection

3.2.1. Sample selection

Cases selected for this study were based on theoretical replication logic, which facilitates

cross case analysis between VCs (Yin, 2013). Theoretical sampling, the preferred sampling

approach for this research, contributed to data reduction and pattern recognition for diverse

groups (Creswell, 2013). Eisenhardt (1989) indicates that random selection is not necessary

nor preferred for research designs that aspire theory building.

Exploring the relationship between entrepreneurial experience and the decision

process of a VC, required a balance of consistency and diversity. Eisenhardt (1989) suggests

to look at within-group similarities and inter-group variations for multiple case selection.

Selection for this study was based on criteria related to the VC. VCs had to actually operate

on behalf of a VCF with at least two

employees. If the analysis also included private business

angels, diverse findings could be attributed to the comparison of two different types of

investors. A sec

ond criterion was that the VC needed to have experience in evaluating

investment opportunities and have experience in investing. This excluded the nascent VCs

that did not have actual investment experience. VCs that not fulfilled the mentioned criteria

were disqualified from the study. Case selection criteria established the within-group

similarities. Inter-group variations were established by selecting cases that included VCs with

and VCs without entrepreneurial experience. Only selecting cases that satisfied the

within-group similarities and inter-within-group variations ensured that relevant theoretical categories of the

examined topic were covered.

So, participants were chosen based on the case selection criteria, and their willingness

to participate in this research. First an overview was made of all the VCFs in the Netherlands

(Appendix A).

Based on the Venture Capital

Ecosystem Landscape provided by Peak Capital

(2017, January 13), 72 Dutch VCFs were identified. 30 of these VCFs were seed stage

investors, 21 were early stage investors, and 21 w

ere later stage investors. By

looking at the

websites of all these VCFs, and by seeing which VCs worked at these VCFs, a total of 246

VCs were found. These VCs had functions such as general partner, investment manager,

co-founder of the VCF, investment director, fund manager and CEO. Juniors, analysts, and

associates

were excluded from the overview, as these people have usually not made or led an

investment. Of 17 VCFs

no website could be found, and therefore no VCs could be identified

of these firms. Analysis of the LinkedIn profiles of

the 246 VCs

resulted in information about

which VC did, and which VC did not have previous experience as an entrepreneur. Founding

the VCF

was not perceived as entrepreneurial experience. Analyzing the LinkedIn profiles

showed that 51 VCs

had previous entrepreneurial experience. No information could be found

for 26 V

Cs, as these VCs did not have a LinkedIn Profile. In

total 17 VCs with and 21 VCs

without entrepreneurial experie

nce were approached to participate in this study.

The 38 VCs

that were approached worked at 36 different VC

Fs. The VCs were invited via telephone calls

or via invitation

emails (Appendix B).

Table 1

Participants of the study

After

approaching 38 VCs, a total of 14 VCs

wanted to participate in this study.

Eisenhardt (1989) indicates that between 4 and 10 cases is usually sufficient for multiple case

studies, however there is not an ideal number. Therefore,

the 14 participating

VCs had to be

acceptable to find rigorous results.

The 14 participating

VCs worked

at 14 different

VCFs,

that were

located in Amsterdam, Leusden, Bilthoven, Enschede, and Groningen. 7 of the VCs

Participant #

VC function

Entrepreneurial

experience

VCF

VCF stage

focus

VCF industry focus

P1E

Co-founder,

Managing Partner

Yes

Ventures

Syllion

Post seed, pre

series A

Technology

P2E

Managing Partner

Yes

Value Creation

Capital

Early stage

B2B IT, technology, nanotech,

cybersecurity

P3E

Senior Investment

Manager

Yes

VCF 3

Every stage

Security, high-tech, clean-tech, life

science

P4E

Partner

Yes

Cottonwood

Technology

Fund

Early stage

Robotics, semi-conductors, chip

industry, energy, raw materials,

sensor technology, high tech health

P5E

Co-founder, Partner

Yes

VCF 5

Pre series A,

series A

Fintech

P6E

Co-founder

Yes

Boralis

Early stage

-

P7E

Co-founder,

Executive Partner

Yes

HenQ

When there is

traction

B2B software

P8X

Senior Investment

Manager

No

VCF 8

Starters,

growers

Life-tech, high-tech

P9X

Investment

Manager

No

VCF 9

-

IT

P10X

Investment

Manager

No

NOM

-

Chemistry, life science, maritime

P11X

Managing Director

No

Cantena

investments

Early stage

Renewable energy, fintech

P12X

Partner

No

VCF 12

When there is

traction

SaaS, data, marketplaces, IT

P13X

General Partner

No

Keen Venture

Partners

Scale-up

Technology

P14X

Partner

No

Brooklyn

had previous entrepreneurial experience, and the other 7 VCs mainly had corporate finance,

consultancy, banking, and management experience. Table 1 provides an overview of the

participants. The name of the VCF of certain participants was changed to ‘‘VCF #’’ since

these participants indicated that they wanted to remain anonymous.

3.3.2. Collection of data

A relevant unit of analysis had to be chosen to provide an answer to the research question.

The unit of analysis for insights in the VC decision process was the VC itself, assuming that

VCs were able to identify what information cues are favored in their evaluation of business

proposals, and why these information cues are favored.

Data was collected via semi-structured interviews with the VCs and via secondary

resources, but the emphasis was on the primary data since the VC itself was the unit of

analysis. An advantage of the semi-structured interview is that the conversation with the

interviewee evolves freely. Interviewees can use their own jargon while discussing subjects

related to the research (Cassell & Symon, 2004), allowing for more in-depth inspection of

issues under investigation. Secondary resources that were analyzed are sites of the VCFs and

LinkedIn profiles of the VCs. Secondary information provided more background knowledge

about the informants and the preferred selection criteria of the VCs. Information that was used

as input for the interviews.

Eventually 14 interviews

were held with VCs, that were key

informants with knowledge about opportunity assessment and investing.

Interviews were held

in the month of May 2017. Duration of the interviews was 38 minutes on average, ranging

between 29 minutes and 47 minutes.

All interviews were conducted by the author. A legend

of the data sources is

provided in Appendix C.

In line with the suggestion by Yin (2013), a semi-structured interview guide was

created that not only covered the main issues relating to the topic, but also allowed

interviewees to elaborate on other issues. The interview guide had to have a consistent format

for all the interviewees to make cross-case analysis possible (Miles & Huberman, 1994).

Topics and questions were specified prior to the interview. Issues described in the interview

guide were general characteristics of the VCF, the work experience of the VC, the screening

process that the VC used, and if there was emphasis on certain selection criteria. Questions

for general characteristics and background information were based on a combination of

relevant literature and prior qualitative questionnaires related to the phenomenon (Kamara,

2015; Nilsson & Pettersson, 2012). A choice experiment was done to get insights into the

decision process of a VC. Two investment opportunities were described for the interviewee,