enhancing venture capital investment evaluation_ a survey of vent

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Journal of Economic and Social Policy

Volume 10Issue 1Enterprising Finance

Article 2

7-1-2005

Enhancing Venture Capital Investment Evaluation:A Survey of Venture Capitalists', Investees' and

Entrepreneurs' PerspectivesAbdul RakhmanSouthern Cross University

Michael EvansSouthern Cross University

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Recommended CitationRakhman, Abdul and Evans, Michael (2005) "Enhancing Venture Capital Investment Evaluation: A Survey of Venture Capitalists',Investees' and Entrepreneurs' Perspectives,"Journal of Economic and Social Policy: Vol. 10: Iss. 1, Article 2.

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Enhancing Venture Capital Investment Evaluation: A Survey of VentureCapitalists', Investees' and Entrepreneurs' Perspectives

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Enhancing Venture Capital InvestmentEvaluation: A Survey of VentureCapitalists', Investees' and Entrepreneurs'Perspectives

Abdul RakhmanDoctor of Business AdministrationGraduate College of ManagementSouthern Cross UniversityandAssociate Professor Michael EvansDirectorGraduate College of ManagementSouthern Cross University

Abstract

This research investigates the use of investment criteria to evaluate

potential partners who seek venture capital. The survey was undertaken in

the South Sulawesi Province of Indonesia. There were 257 respondents who

completed questionnaires. Three groups participated in this survey: venture

capitalists (VCs), firms that provide venture capital funds to entrepreneurs

to develop their businesses; entrepreneurs, who might seek venture capital

in the future; and investees, businesses currently in receipt of venture

capital. The three groups were asked to judge how important a range of

investment criteria was, using a four-point scale. Each group used adifferent questionnaire and several variables were designed to cover

investment criteria that were only relevant to VCs, entrepreneurs or

investees. Data analysis indicated that, for several criteria, VCs shared

interests with entrepreneurs and investees. However, the three groups did

not always share investment preferences.

Introduction

This study investigated the attitudes of venture capitalists (VCs), or finance

providers; entrepreneurs, or those seeking finance; and investees, or those inreceipt of finance, to the personality and experience, product/service, market,

financial and monitoring system, and overall relations of the venture capital

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Rakhman and Evans: Enhancing Venture Capital Investment Evaluation: A Survey of Vent

Produced by The Berkeley Electronic Press, 2005
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Enhancing Venture Capital Investment Evaluation: A Survey of Venture Capitalists'Investees' and Entrepreneurs' Perspectives 2

process. The study also aimed to determine differences in responses from the

three groups to a range of investment criteria. It was hoped that the variables

could be reduced, using factor analysis, to identify the most important

investment factors to the group as a whole.

Literature Review

VCs provide finance to entrepreneurs and share the risks of a venture with

them. Venture capital is risky and deals with small business enterprises, in

particular, new ventures. The evaluation procedure used by VCs has become

an important issue in venture capital. Many investment criteria may be

considered in assessing entrepreneurs in order to accept their proposed

businesses and provide finance (Boocock & Woods 1997; Hall & Hofer 1993;

MacMillan et al. 1985, 1987; Tyebjee & Bruno 1984).

The empirical research on VC decision making has produced a range of

criteria that VCs report being used when evaluating new venture proposals

(Fried & Hisrich 1994; Mason & Harrison 1994; Tyebjee & Bruno 1984;

Wright & Robbie 1996). However, potential partners, the entrepreneurs, also

want to be well informed of the criteria VCs use for evaluation. This could

help them influence the VC decision-making process (Zacharakis 2001).

Previous research (Zacharakis and Meyer 1998) found that a lack of insight by

applicants for capital affected the nature of VC decision making.

Investment Evaluation Stages

Previous research has illustrated the investment activities as a sequentialprocess involving several steps. The process can be summarised into five

steps: deal origination, screening, evaluation, deal structuring and post-

investment activities (Boocock & Woods 1997; Fried & Hisrich 1994;

Tyebjee & Bruno 1984).

Tyebjee and Bruno (1984) defined deal origination as the process in which

VCs face a very poorly defined environment within which to find prospective

deals. They believed that the typical investment prospect was too small and

various intermediaries played an important role in matching VCs with fledging

ventures with cash needs. Boocock and Woods (1997) explained that this stage

involved using prospective investments from a variety of sources, includingintermediaries or other financial institutions.

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Tyebee and Bruno (1984) emphasized that VCs' screening criteria reflect a

tendency to limit investment to areas the VC was familiar with, in terms of

technology, product and market scope of the venture. In the evaluation stage,

Tyebjee and Bruno (1984) found that VCs had to rely on a subjective

assessment procedure based on the business plan presented by venture's

management. Boocock and Woods (1997) emphasized the business plan in a

search for key features of VC decision making.

In the deal-structuring step, Boocock and Woods (1997) explained that the

deal would be consummated only if VCs and entrepreneurs were able to

structure a mutually acceptable agreement. From the perspective of the VCs,

they would take into consideration the equity share the entrepreneur would

give up in exchange for the venture capital. VCs would also consider

covenants that limited capital expenditure and management salaries (Tyebjee

& Bruno 1984).

After the deal is finalised, the role of the VC expands from investor to

collaborator. This could be through formal representation on the board ofdirectors or informal influence in the market, supplier and creditor networks.

These roles are performed as post-investment activities. However, Tyebjee

and Bruno (1984) found that this did not mean that VCs were likely to exert

control over the day-to-day operation of the venture.

Investment Criteria

A number of studies have been undertaken in many countries regarding VCs'

investment criteria. These indicate that VCs in different cultures use varying

criteria for evaluating proposals.

Hall and Hofer (1993) developed six main investment criteria: venture capital

firm requirements; characteristics of the proposal; characteristics of the

entrepreneur/team; nature of proposed business; economic environment of the

proposed business; and strategy for the proposed business. Boocock and

Woods (1997) applied a similar methodology in the UK.

McMillan et al. (1985) studied investment criteria in terms of five broad

classifications: entrepreneur's personality; entrepreneur's experience;

characteristics of the product or service; characteristics of the market; and

financial considerations. They found that it was the quality of entrepreneurthat ultimately determines the funding decision. Interestingly, Knight (1994)

found that the responses from Canadian VCs were slightly different from their

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counterparts in the USA. In Canada, VCs rated the entrepreneur's personality

and experience much higher than product, market characteristics and financial

considerations. US investors were far more concerned with financial returns

and the liquidity of their investment.

Rah et al. (1994) undertook a study in Korea of investment criteria in six

broad categories: managerial capabilities; financing ability; superiority ofproduct and technology; availability of raw materials; production capability;

and market attractiveness. They found interesting results, in that, VCs used

market attractiveness as the most critical factor in deciding whether or not to

fund a proposal. This was similar to Japan, where VCs were relatively much

more focused on the development of new markets in evaluating prospective

investments and relied heavily on market criteria (Ray & Turpin 1993).

Venture Capital in Indonesia

Venture capital is the funds provided without collateral to entrepreneurs to

help them develop their businesses and which they repay partly in terms of ashare in the profit earned, based on the deal contract. Entrepreneurs who

operate in profitable businesses are clearly eligible for venture capital.

However, as the venture capital industry in Indonesia is regarded as being in

its infancy, compared with those of America and Europe, the selection process

is highly competitive.

Even though there is a growing belief that venture capital is a bridge to

develop business, the selection process must be implemented properly to

protect VCs from bad debts. The Indonesian government has a revolving

venture capital system, which is a program to put state-owned funds through

VCs. Profits from VCs may be used to set up new VCs in other cities and

provinces.

VCs in Indonesia must seek profitable business partners. However, venture

capital is often seen by Indonesian entrepreneurs as a gift to promote

economic development. Many entrepreneurs believe that they do not have to

repay the funds because it is the government's duty to provide funds to small

businesses.

The agreements between VCs and investee companies can take a range of

forms. Under Indonesian Corporation Law 1994:

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VCs can invest in investee companies by buying some of the investees'shares and becoming shareholders. Therefore, VCs must obey the code

of conduct in Indonesian Corporation Law article 1.

VCs can invest in investees by limited participation, by which VCsinvest funds without being actively involved in operational matters. VCs

receive a share of the profits based on the terms of the agreement.

VCs can only engage with small- and medium-sized enterprises whichhold an Indonesian business number or approval from the Department of

Industry and Trading.

VCs must ensure that all small and medium businesses have theopportunity to seek funds through the venture capital system.

VCs can invest in convertible bonds, whereby investees get funds fromVCs as liabilities but must ensure that, over a certain period, these funds

are converted to shares.

Definition of Small Enterprises: Indonesian Perspective

The Indonesian Constitution Number 9, 1995, was set up to govern how the

Indonesian government should deal with small enterprises. The Constitution

defines a small enterprise as any small-scale economic activity that meets the

criteria of net worth, annual sales or ownership status as it is ruled in the

Constitution. Article 5 of the Constitution states that the criteria for a small

enterprise are that it:

possesses a net worth of a maximum of Rp.200 million excluding landand building used in the operation, or possesses annual sales of a

maximum of Rp.1 billion;

is owned and operated by an Indonesian citizen and is autonomous andin the form of an individual business or a business body that is not

legally incorporated or a business body that is legally incorporated and a

cooperative;

is independent and not a subsidiary of, or affiliated with, any companythat is owned or controlled directly or indirectly by medium or large

companies;

has a structure of sole proprietorship, business enterprise without anylegal entity or business enterprise with legal entity, including

cooperative.

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South Sulawesi Venture Capital Company

The South Sulawesi Venture Capital Company (SSV) is the only venture

capital firm in the South Sulawesi Province of Indonesia. SSV was established

on 24 December 1994 under the Department of Finance of Indonesia and

included prominent business people. The company started operations in 1995.

The number of staff was only seven from 1995 to 1996, but increased to 30 in2001. Outstanding funds increased dramatically in 1997 because the company

received Foreign Direct Investment from the South Korean government

through Jexim Funds. The company has provided Rp.30.5 billion to 126

investees up to the year 2001. It started to make a significant profit from 1997

to 2000, after new directors were appointed and more flexible investment

criteria applied to grow its investment base (SSV Annual Report1995-2001).

Methodology

A questionnaire was sent to a total of 450 potential respondents in South

Sulawesi in June, July and August 2002. Of these, 45 were VCs, 120 investees

and 285 entrepreneurs. There were five data collectors who conducted the

survey, in addition to a mail survey. There were 257 respondents who

completed the questionnaires giving a response rate of 57%. There were 100

respondents who returned the questionnaire by mail and 157 who completed it

directly with the data collectors. There were 30 VCs, 126 entrepreneurs and

101 investees who returned the questionnaires. All the VCs were located in

Makassar City, the capital of South Sulawesi Province. There were 60

investees and 29 entrepreneurs who also lived in the capital city making a total

of 119 respondents (46.13%) from the capital. The other 138 respondentscame from 16 small cities in the province. All the VCs were working at SSV

and all the investees had received funds from SSV. The entrepreneurs were

business people who operated in South Sulawesi Province, but had not

received funding from SSV.

The respondents were asked to evaluate the importance of the investment

criteria using a four-point scale, where 1 = irrelevant; 2 = desirable, 3 =

important and 4 = essential. This scale was chosen to enable comparison with

previous research. The data was analysed with parametric tests, Kruskal

Wallis, Pearson's Chi-Square, Fisher Exact Test, factor analysis and

multidimensional scaling.

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Results

The results of this research are presented in the following sections. The first

section gives the responses from the three groups to the six main investment

criteria: personality and experience; product/service; market; financial; other

criteria; monitoring and relations. Section two will report on the factor

analysis in relation to the criteria. Section three will analyse the responsesusing multidimensional scaling.

Responses to Investment Criteria

This section will present the responses from VCs, entrepreneurs and investees

to the six main criteria. The responses are based on the questions put to each

group and some of the items are only applicable to certain groups. The

investment criteria, which are unique to VCs, might be not applicable to

entrepreneurs and investees or vice versa.

Venture Capitalists

Table 1 presents the responses of the VC group to the range of investment

criteria. Overall, VCs considered projected cash flow to be essential and, as

expected, rated items that used conventional methods of evaluation and items

for financial control as very important. They also rated other main criteria,

such as personality, product/service, market and monitoring and relations, as

important.

Table 1: VCs' Responses to Investment Criteria

Scale used 1 = Irrelevant 2 = Desirable 3 = Important 4 = Essential

Rank MainCriteria

Items Mean SD

1 Honesty, openness and approachability 3.47 0.681

2 Willingness to cooperate in monitoring system 3.43 0.858

3 Functional areas ability 3.37 0.718

4 Integrity 3.30 0.837

5 Entrepreneur's experience 3.30 0.877

6 Familiarity with entrepreneur's background 3.23 0.728

7 Familiarity with VC's rules 3.20 0.847

8 Hardworking 3.17 0.913

9 Risk management 3.13 0.776

10 Venture capital only for profitable businesses 3.03 1.003

11 Tight control of spending 3.03 0.865

12 Self-confidence 2.90 0.99513 Leadership 2.90 0.712

14 Referred by trustworthy source 2.87 0.972

15

Personalityand

Experience

Providing collateral 2.80 0.931

7


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RankMain

CriteriaItems Mean SD

16 Familiarity with market targeted 2.70 0.988

17 Willingness to hire staff to cover weaknesses inmanagement

2.67 0.994

18 Formal qualifications 2.37 0.999

19 Entrepreneur is known to other entrepreneurs 2.23 0.898

20 Personality compatible with VC 2.03 0.928

21 Recommended by local government or leading

business people

1.63 0.964

22 Entrepreneur must be a friend, relative or family

member of VC

1.27 0.583

1 Raw materials available 3.47 0.571

2 Well accepted 3.13 0.730

3 Demonstrated market acceptance 3.10 0.607

4 In the market for many years 2.87 0.860

5 Functioning prototype 2.80 0.610

6 Is proprietary or can be otherwise be protected 2.53 1.042

7

Product/

service

May be described as high-tech 2.10 0.803

1 Market Marketing skills 3.40 0.675

2 Reasonable marketing plan 3.27 0.740

3 Strong marketing team 3.17 0.648

4 Significant growth rate 3.10 0.662

5 Entrepreneur knows distribution system 3.03 0.765

6 Stimulates an existing market 3.00 0.910

7 Market not saturated 2.97 0.890

8 Contract agreement 2.83 0.950

9 Familiarity with industry 2.73 0.785

10 Targeting national market 2.43 0.774

11 Little threat of competition in first three years 2.37 0.928

12 Targeting new market 2.37 0.850

13 Targeting foreign market 2.13 0.819

1 Financial Use projected cash flow 3.50 0.572

2 Use IRR method in evaluation 3.47 0.571

3 Use return on investment (ROI) 3.27 0.691

4 Use cost/benefit ratio 3.23 0.817

5 Use net present value method in evaluation 3.23 0.679

6 Require audited financial report 3.03 0.669

7 Require monthly financial report 3.00 0.871

8 Require employment of accounting staff 2.67 0.606

9 Require entrepreneur to invest 50% of funds 2.33 0.868

10 Require 5% higher return than national interest rate 2.20 0.997

11 Require hiring of management consultant 2.20 0.761

12 Require pilot test project with smaller investment 1.87 0.819

13 Require entrepreneur not to invest in land, building

or truck

1.77 0.898

14 Will not make subsequent investment 1.67 0.802

1 VC must prevent unfair trading with investee orothers

3.40 0.855

2

Othercriteria

Will consider number of years of investment 3.40 0.770

8


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RankMain


3 Will consider general economic conditions 3.37 0.669

4 Will consider multiplier effect 3.00 0.743

5 Must be involved in feasibility studies 2.97 0.809

6 Will consider regional economic plan 2.57 0.858

1 Monitoring

andrelations

Can take legal action if investee does not pay

principal on time

3.47 0.860

2 Will monitor investee's financial performance

monthly

3.40 0.621

3 Can transfer their equipment to other investees if

current investee breaks agreement

2.77 1.135

4 Will provide management service 2.60 0.814

5 Will look at opportunities to expand investee's

businesses

2.57 0.898

6 Require weekly report 2.47 0.860

7 Will be involved in development of actual

product/service

2.43 0.898

8 Will be involved in business plan 2.40 1.003

9 Will be involved in the search for a management

team

2.30 0.915

10 Will appoint board of directors of investee company 2.27 0.828

11 Will help investee in seeking finance from other

financial institutions

2.17 0.791

Source: Developed from this research.

VCs rated 11 out of 22 items under personality and experience as important,

including entrepreneurs' background, integrity, experience and risk

management.Availability of raw materials, marketing skills,preventing unfair

trading and taking legal action if investees did not pay principal on time were

also rated very highly.

Table 1 shows that VCs rated six items under personality and experience asfairly important: confidence; leadership; referred by trustworthy source;

providingcollateral; familiarity withmarket targeted; and willingness to hire

staff to cover weaknesses in management.Recommendation andfriend, family

member or relative, were believed to be irrelevant. This might be due to the

common assumption that friendship and recommendations do not guarantee

entrepreneurs' business success.

For the product/service criteria, has been in the market for many years and

functioning prototype were believed to be fairly important, whereas

proprietary and high-tech were desirable.

For the market criteria, market not saturated, contract agreement and

familiarity with industry as less important, and national market, little threat of

9


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competition, venture will create new market and foreign marketwere rated

desirable.

For the financial criteria, VCs rated accounting staff as fairly important and

entrepreneur to invest 50% of funds, 5% higher return than national interest

rate and hiring management consultant as desirable. VCs rated pilot test

project with smaller investment, not investing in land, building or truckand nosubsequent investment very low, and these items were believed to be

irrelevant.

For other criteria, VCs rated feasibility studies and regional economic plan as

fairly important. For the monitoring and relations criteria, transfer of

equipment, service in management and opportunity to expand investee's

business were believed to be fairly important. VCs gave low scores to six

items in monitoring and relations. These items weekly report from investee,

development of actual product/service, business plan, candidate management

team, board of directors and helping investees seek finance from other

institutions were believed to be desirable.

Entrepreneurs

Table 2 presents the entrepreneurs' responses to the investment criteria.

Table 2: Entrepreneurs' Responses to Investment Criteria


RankMain

Criteria

Items Mean SD

1 Risk management 3.52 0.666

2 Hardworking 3.29 0.705


4 Tightly controlled budget 3.18 0.774

5 Experience 3.17 0.749

6 Integrity 3.17 0.728

7 Self-confidence 3.13 0.759

8 Recommendation from trustworthy source 3.00 0.849

9 Leadership 2.91 0.867



12 Being known by other entrepreneurs 2.84 0.871

13 Familiarity with market targeted 2.81 0.73414 Familiarity with venture team's reputation 2.78 0.911

15 Profitability rate 2.64 1.084

16

Personality

and

Experience

Willingness to cooperate in monitoring system 2.57 1.062

10


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RankMain


17 Recommendation from local government 2.48 0.919

18 Providing collateral 2.41 0.982

19 Being well known to VC 2.40 0.973

20 Willingness to hire staff to cover weaknesses inmanagement

2.27 0.916

21 Personality compatible with VC 2.24 0.925


member of VC

1.90 0.942



3 Availability of technology 2.94 0.813

4 Developed for many years 2.91 0.727


6 Popular 2.71 0.937

7

Product/

service


1 Market Ability to attract customers 3.29 0.757


3 Knowing distribution system 3.21 0.744


5 Familiarity with marketing strategy 3.06 0.773


7 Knowing other competitors 2.91 0.830

8 Having a sales contract 2.80 0.904




12 Targeting foreign market 2.29 1.151


1 Agree to submit to audited financial report 3.18 0.784

2 Agree to be evaluated using IRR 3.18 0.720

3 Agree to provide monthly financial report 3.02 0.769

4 Agree to employ an accountant 2.98 0.748

5 Agree to provide monthly report 2.93 0.831

6 Agree to submit land certificate 2.71 0.920

7 Agree to submit projected cash flow 2.67 0.778

8 Agree to open joint account with VC 2.44 1.024

9

Financial

Agree to pay 5% more than national interest rate 2.14 1.018

1 Agree to pay back principal even if business fails 3.12 0.796

2 Will consider economic conditions 2.97 0.779

3 Agree to invest 50% of funds 2.80 0.800

4 Agree to cooperate with other companies proposed by

VC

2.63 0.864

5 Agree to a short investment period 2.45 0.909

6

Other criteria

Agree to obey environmental protection laws 2.44 1.149

1 Entrepreneur must maintain a good relationship with

VC

3.24 0.814

2

Monitoring

and relations

Entrepreneur must actively develop trust with VC 3.10 0.834

11


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RankMain


3 VC to monitor entrepreneur's financial performance

monthly

2.93 0.878

4 VC can take legal action if entrepreneur does not pay

principal on time

2.70 1.112

5 VC to be involved in providing a business plan 2.56 0.806

6 VC can transfer their equipment to other investees if


2.56 1.054

7 VC to be involved in developing product/service 2.53 0.855

8 Agree to provide weekly report 2.20 0.955

9 Agree to accept board of directors appointed by VC 2.10 0.893

10 VC to be involved in the search for a management

team

2.08 0.943


For the personality and experience criteria, entrepreneurs rated risk

management as essential. They rated seven items under personality and

experience as important: working hard; honesty; openness andapproachability; tightly controlled budget; experience; integrity; self-

confidence; and recommendation from trustworthy source.

Entrepreneurs rated eight items under personality and experience as less

important: leadership; functional areas ability; formal qualifications; being

known by other entrepreneurs; familiarity with target market;familiarity with

venture team's reputation;profitability rate; and willingness to cooperate with

monitoring.

They also rated five items under personality and experience as desirable:

recommendation from local government; providing collateral; being well

known by VCs; hiring staff to cover weaknesses in management; and

personality compatible with VCs. Entrepreneur must be a friend, familymember or relative of VCwas believed to be only fairly desirable.

For the product/service criteria, entrepreneurs rated well accepted as very

important and raw materials available as important. Technology has been

developed for many years, has been in the market for many years and

product/service popularwere rated fairly important. High-tech was rated as

desirable only.

For the market criteria, five items were rated as important: capability in

attracting customers; marketing plan; distribution system; market is not

saturated; and marketing strategy. Entrepreneurs were not keen to applyfinancial methods and none of the items in the financial criteria were rated as

very important. However, they rated audited financial report,internal method

12


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and monthly financial report as important. Strong marketing team, knowing

other competitors, sales contract, significant growth rate, and targeting new

market were rated fairly important, while targeting national market and

targetingforeign marketwere rated desirable.

For the other criteria, entrepreneurs rated paying back principal even if

business failed as important. Considering economic conditions, investing anequal amount of funds and cooperating with other companies were considered

less important. Short investment periodand obeying environmental protection

laws were rated desirable.

Finally, under monitoring and relations, maintaining a good relationship with

VCand actively developing trust with VCwere believed to be important and

monthly financial performance, legal action, business plan, transfer of

equipment and developing product/service were considered fairly important.

Weekly report, board of directors and search for candidate management team

were classified as desirable only.

Investees

Table 3 presents the investees' responses to the investment criteria.

Table 3: Investees' Responses to Investment Criteria


RankMain



2 Leadership 3.48 0.715

3 Good business plan 3.27 0.581

4 Self-confidence 3.27 0.7065 Ability to adjust to difficult situations 3.26 0.577

6 Ability to identify market 3.22 0.522


8 Business strategy 3.18 0.590

9 Experience 3.07 0.711

10 Track record 3.03 0.801

11 Being known by other entrepreneurs 2.84 0.845


13 Background 2.65 0.899

14 Strong management team 2.63 0.997

15 Really interested in VC 2.50 0.996

16 Willingness to hire staff to cover weaknesses in

management

2.32 0.824

17 Recommended by local government or leading

business people

2.18 0.953

18

Personality

and

experience

Relying on venture capital only 2.16 0.987

13


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RankMain


19 Recommended by banks and other financial

institutions

2.09 0.950

20 Presenting land ownership for collateral 1.95 0.994

21 Friend, family member or relative of VC 1.93 0.908

22 Business chamber membership 1.84 0.896




4 Popular 2.93 0.778

5 Availability of technology 2.93 0.803

6 Developed for many years 2.69 0.797

7

Product/service


1 Market Ability to attract customers 3.40 0.665

2 Having a sales contract 3.38 0.719


4 Knowing distribution system 3.35 0.655

5 Targeting international market 3.18 1.004


7 Marketing strategy 3.13 0.643



10 Knowing other competitors 2.94 0.870



13 Enjoying a significant growth rate 2.78 0.789


1 Agree to be evaluated using internal rate of return

method

3.06 0.705

2 Agree to employ accountant 3.05 0.536

3 Agree to discuss monthly cash flow 2.97 0.754

4 Agree to submit audited financial report 2.95 0.638

5 Agree to make monthly report 2.94 0.798

6 Agree to submit projected cash flow 2.69 0.797

7 Agree to submit land certificate 2.43 0.942

8 Agree to open joint account with VC 2.23 0.893

9 Agree to pay 5% more than national interest rate 2.03 0.900

Financial

1 Agree to pay back principal even if business fails 2.98 0.616

2 Will consider economic conditions 2.81 0.744

3 Agree to obey environmental protection laws 2.79 1.160

4 Agree to a short investment period 2.76 0.981

5 Agree to invest 50% of funds 2.75 0.727

6

Othercriteria

Agree to cooperate with other companies proposed

by VC

2.59 0.777

14


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RankMain


1 VC must actively develop trust with investee 3.48 0.687

2 VC must maintain a good relationship with investee 3.45 0.685

3 VC must monitor investee's performance monthly 3.04 0.647

4 VC must be involved in providing a business plan toinvestee

2.86 0.693

5 VC must be involved in developing actualproduct/service

2.76 0.789

6 VC can transfer their equipment to other investees if


2.61 0.916

7 VC can take legal action if investee does not pay

principal on time

2.54 1.100

8 Agree to accept board of directors appointed by VC 2.36 0.832

9 VC to be involved in the search for a management

team

2.20 0.917

10

Monitoring

and

relations

Agree to provide weekly report 1.91 0.960


For personality and experience, investees rated honesty, openness and

approachability as essential, the highest score in the table. Leadership was

classified as very important. The remaining eight criteria were believed to be

important.

For the product/service criteria, the group rated well accepted and raw

materials available as very important and has been in the market for many

years as important.

For the market criteria, the group rated ability to attract customers, having a

sales contract, reasonable marketing plan and knowing distribution system asvery important. Targeted international market, strong marketing team,

marketing strategy, targeted a new marketand market is not saturated were

rated as important.

For financial criteria, using IRR and employing an accountant were rated as

important. This indicates that investees did not consider many evaluation

methods to be important.

Finally, under monitoring system and relations, VC must actively develop trust

with investee and VC must maintain a good relationship with investee were

rated very important. The group also rated the item VCmust monitor investee'sperformance on a monthly basis as important.

15


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Most of the items in table 3 indicated that investees were concerned about the

relationship of the entrepreneur, popularity of product, knowing other

competitors, using monthly cash flow, commitment to paying back principal

and involvement in business plan. These items were rated as fairly important.

Similarities and Differences

Table 4 shows three items have similar responses. Showing self-confidence

was believed to important by entrepreneurs and investees, and VCs rated it as

fairly important. All groups rated experience as important and willingness to

hire staff to cover weaknesses in managementas desirable.

All groups rated honesty, openness and approachability and capability of

managing risks before being accepted by venture capitalists very high. VCs

and entrepreneurs rated leadership as less important, but investees rated it very

high. VCs rated entrepreneur's backgroundvery high, investees rated it fairly

important and entrepreneurs rated it as desirable. Entrepreneurs and investees

rated friend, family member or relative as fairly desirable, but VCs rated it asirrelevant. Entrepreneurs and investees rated known by other entrepreneurs as

fairly important, whereas VCs rated it as desirable. VCs and investees rated

functional areas ability as very important while entrepreneurs rated it as less

important. Entrepreneurs and investees rated formal qualifications as fairly

important but VCs rated it as desirable only.

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Table 4: Significance Test of Personality and Experience Criteria

No Criteria

Venture

Capitalists'

Mean (SD)

Entrepreneurs'

Mean (SD)

Investees'

Mean

(SD)

Pearso

Squ

p-va

1 Honesty, openness and approachability 3.47 (0.681) 3.26 (0.841) 3.58 (0.667) 0.070

2 Leadership 2.90 (0.712) 2.91 (0.867) 3.48 (0.715) 0.000*

3 Self-confidence 2.90 (0.995) 3.13 (0.759) 3.27 (0.706) 0.047

4 Familiarity with entrepreneur's background 3.23 (0.728) 2.40 (0.973) 2.65 (0.899) 0.001*

5 Willingness to hire staff to cover weaknesses in

management

2.67 (0.994) 2.27 (0.916) 2.32 (0.824) 0.043


member of VC

1.27 (0.583) 1.90 (0.942) 1.93 (0.908) 0.004*

7 Recommendation by local government or leading

business people

1.63 (0.964) 2.48 (0.919) 2.18 (0.952) 0.000*

8 Entrepreneur known to other entrepreneurs 2.23 (0.898) 2.84 (0.871) 2.84 (0.845) 0.021

9 Functional areas ability 3.37(0.718) 2.88 (0.952) 3.20 (0.791) 0.026

10 Entrepreneur's experience 3.30 (0.877) 3.17 (0.749) 3.07 (0.711) 0.101

11 Formal qualifications 2.37 (0.999) 2.84 (0.862) 2.66 (0.637) 0.000*

12

enhancing venture capital investment evaluation_ a survey of vent

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