Chapter 6: The Pre-investment Process: Venture Capitalists’ Decision Policies
Andrew Zacharakis and Dean A. Shepherd Introduction The venture capital process can be thought of as a series of activities or stages that each new venture works through from the time the venture is ﬁrst proposed up until the time when the venture capital ﬁrm successfully exits from the venture and takes its proﬁt. For example, Tyebjee and Bruno (1984) proposed a model of the venture capital process with ﬁve such stages: (1) deal origination – seeking potential investments; (2) deal screening – quick review of business plans and/or oral proposals, both solicited and unsolicited; (3) deal evaluation – for those deals that pass the screen, more in-depth due diligence to validate business model and prospects; (4) deal structuring – establishing and negotiating the terms of the investments; and (5) post-investment – value-added activities such as serving on the board, assisting with follow-on investment and liquidity events. Preinvestment activities refer to all venture capital tasks up to and including the signing of an investment contract: soliciting new venture proposals for submission to the venture capital ﬁrm, determining whether these proposals meet the ﬁrm’s broad screening criteria, conducting due diligence (more extensive research to determine the likely success of the venture), and then negotiating and structuring a relationship with the entrepreneur. In this chapter we focus on the screening phase of the pre-investment process – speciﬁcally, what decision criteria are important to the investment decision and how this decision process works – while post-investment activities will be discussed in detail in the next chapter by De...
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