Characteristics of startup teams VCs consider when making early-stage investment decisions

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School of Business | Master's thesis
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Entrepreneurship and Innovation Management
Investing in early-stage startups is one of the most challenging and risky forms of investing. This inherent complexity stems from the uncertainty under which these decisions must be made; products are new, members of the founding team may lack a track record, and it is unclear how the team can work together to grow the business. Nonetheless, early-stage investment is a critical undertaking for venture capitalists (VCs), and thus is a common and widespread undertaking, with large returns at stake. However, key questions about VCs investment decision making remain unstudied, leaving startup teams with few insights on how they should position themselves and approach VCs. For instance, most existing research focuses on large cross-sectional datasets that explore a wide array of industry, financial, market, and team factors. These expansive datasets therefore lack the resolution to explore the complexity of team evaluation in detail. As a result, though a startup team may know that they will be evaluated by VCs, existing literature provides few practical insights about exactly what aspects of the team will be evaluated, and how. Therefore, we ask the practically-oriented research question of: What characteristics of startup teams do VCs consider when making early-stage investment decisions, and how are these characteristics integrated and considered as a whole? How does the importance of these characteristics vary across different VCs? To explore this question, topline VC investors from North-Europe investing in early-stage technology startups were studied. We interviewed two VCs at each of our four focal firms. Moreover, we asked our eight informants about investment decisions (i.e. startups) that several of them had evaluated. These real-life evaluation examples meant that we were able to capture the complexity of decision making. Moreover, that we chose several startups that had been evaluated by at least two of the VCs ensured comparability across the decision-making processes. In total, we covered 13 investment decisions at the four VCs. These interviews clearly showed that the most challenging and ultimately the most important single aspect when investing in early-stage startups is the team. Analysis of the data produced a rich set of findings, which were then used to create practical recommendations. This research identified and utilized six evaluation criteria, which were domain expertise, technological expertise of CEO, familiarity with founder, weight of CEO versus the team, level of involvement and young versus older founders. The findings for each of these criteria were different between the investors, each valuing and viewing the factors differently. This illustrated the large variance of opinion and preference, and the challenge entrepreneurs faced when trying to understand the phenomenon. In light of these findings, three practical recommendations were made. Firstly, entrepreneurs and investors being familiar with each other was seen to be important to both parties. Entrepreneurs benefit from understanding the thinking of the VC they are contacting, and VCs themselves value the opportunity to become familiar with possible investment targets ahead of time. Secondly, experience as a topic was highly interesting as the investors had varying views. Some value experience in an industry, others value a previous background in entrepreneurship, while others see experience as more abstract. Thirdly, regarding the early team the CEO had a magnified importance. The findings circulated topics such as the founder’s ability to grow a company and evolving alongside it.
Thesis advisor
Shulist, Patrick
startup teams, technology, entrepreneurship, venture capital, evaluation, early-stage
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