Title: Equity investment decisions for technology based ventures

Authors: Paul D. Guild, Jagdeep S. Bachher

Addresses: Department of Management Sciences, Faculty of Engineering, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada. ' Department of Management Sciences, Faculty of Engineering, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada

Abstract: One major challenge facing early stage technology based companies is obtaining timely capital to aid their growth. This study sought to advance understanding of the decision making criteria currently used by Canadian equity investors to evaluate technology based companies which are seeking early stages of financing (seed, start-up or first stages). Sixty individuals belonging to one of three equity investor types participated: business angels (BAS, n=20), private venture capitalists (PVCs, n=20) and public venture capital funds (PVCFs, n=20). Data were collected using questionnaires administered through on-site personal interviews. Analyses reported here focus on group differences among decision making criteria as investors evaluated the business worthiness of one of their recent specific technology based business ventures. A total of 95 criteria were derived from previous investment literature and these subsequently received a priori assignment to one of these five categories: (1) characteristics of the entrepreneur(s), (2) characteristics of the market targeted by the venture, (3) characteristics of the venture offering, (4) investor(s) requirements and (5) characteristics of the investment proposal from the venture to the investor(s). Stability of ranked importance ordering for these five categories was tested using Friedman two-way ANOVA by ranks. Results revealed significant stability among the five categories within groups of each investor type: for BAS, the order of importance was (1,3,2,4,5); for PVCs, it was (1,2,3,4,5) and for PVCFs, it was (1,2,3,5,4). Next, specific key criteria as applied by these types of investors were located. For example, key criteria for BAS included: the entrepreneurs| familiarity with product and market; their familiarity with customer requirements; their ability to anticipate need for change; and evidence of truthfulness in their proposal. For PVCs, key criteria included: the entrepreneurs| ability to bring about change; attractive growth potential of market; cash out potential expected by the investors; and expected rate of return on investment to the investors. For PVCFs, key criteria included: evidence of truthfulness in the proposal; the entrepreneurs| familiarity with customer requirements; and their management commitment to success.

Keywords: decision making criteria; equity investment; equity investors; business angels; Canada; private venture capitalists; public venture capital funds; financing innovation; technological entrepreneurship; new ventures; technopreneurship; technology based ventures.

DOI: 10.1504/IJTM.1996.025516

International Journal of Technology Management, 1996 Vol.12 No.7/8, pp.787 - 795

Published online: 22 May 2009 *

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