Kirk Zeller , DBA


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"Financing and Beyond: The Role of Venture Capital in Silicon Valley Based Medical Device Companies"


VC Investment Criteria-VC and CEO Perspectives
Market size was the investment criteria that received the most emphasis. VCs valued market size most highly, followed by competitive advantage and management experience of the team which tied for second. This may have been influenced by the fact that the VC sample consisted of relatively early stage investors. Third parties also placed much emphasis on market opportunity and competitive advantage. The emphasis on market opportunity and competitive advantage are consistent with publications (MacMillan 1987). The CEOs, however, felt that VCs valued management team experience and industry experience most highly, with market size a not too distant third. Surprisingly little value was placed on IRR and time to exit by VCs who along with CEOs ranked them seventh and ninth, respectively, out of ten criteria. It should be noted that studies have shown that VCs have little understanding of their own investment decisions and that studies based on how VC perceive they make decisions have limited reliability (Zacharakis 1998, Shepherd 1999).

The following summarises the results of the surveys on investment criteria given to CEO, VCs, and third parties. Investment criteria evaluated by the survey are shown below. Survey participants were asked to evaluate the level of importance of each criteria in the financing decision of the VC. CEOs and third parties were asked to evaluate based on how they believed VCs valued each criteria in financing decisions. The results were ranked as follows:

Investment Criteria
=CEO=
Management experience of team
Industry experience of team
Market size
Competitive advantage
Ease of exit
IP Protection
IRR
Relationships
Time to market
Geographic location

=VC=
Market size
Competitive advantage
Management experience
Industry experience of team
IP Protection
Ease of exit
IRR
Relationships
Time to market
Geographic location


Results Comparison
There was significant disconnect in that CEOs ranked market size third and competitive advantage fourth, while VCs ranked these one and two respectively. Third parties also rated market size and competitive advantage highly.

Another interesting difference was that CEOs felt the management team was valued highly, while among VCs it tied for second and was last in third party surveys. This is also consistent with interview results in which some early stage VCs mentioned that the management team was not that important as a good management team could be recruited if the opportunity was attractive enough.

For both the CEO and VC surveys such factors as IRR, relationships, time to market and geographic location were the last four respectively. This is consistent with interview results and comments made during the interviews. This result was likely influenced by the fact that the VC sample tended to focus on early stage investing and many of the questions to VCs, CEOs, and third parties were focused on early stage financings. Interestingly IRR, relationships, time to market and geographic location all ranked very high in the third party survey, but this difference may be due to the fact that there were only two third party participants and one of the third parties seemed to focus more on growth and expansion stage services.


Copyright 2004 Kirk Zeller, All rights reserved