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Handbook of Research on Venture Capital

Edited by Hans Landström

This Handbook provides an excellent overview of our knowledge on the various facets of managerial venture capital research. The book opens with a thorough survey of venture capital as a research field; conceptual, theoretical and geographic aspects are explored, and its pioneers revisited. The focus then shifts to the specific environs of venture capital.
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Chapter 6: The Pre-investment Process: Venture Capitalists’ Decision Policies

Andrew Zacharakis and Dean A. Shepherd


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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