The evaluation criteria used by venture capitalists: evidence from a UK venture fund

Grahame Boocock and Margaret Woods are Lecturers in Banking and Finance, andFinancial Management, respectively at Loughborough University Business School,England. The paper examines how venture fund managers select their investeecompanies, by exploring the evaluation criteria and the decision making processadopted at one UK Regional Venture Fund (henceforth referred to as the Fund). Theanalysis confirms that relatively consistent evaluation criteria are applied across theindustry and corroborates previous models which suggest that venture capitalists’decision making consists of several stages. With the benefit of access to the Fund’sinternal records, however, this paper adds to the current literature by differentiatingthe evaluation criteria used at each successive stage of the decision-makingprocess. The paper presents a model of the Fund’s activities which demonstratesthat the relative importance attached to the evaluation criteria changes asapplications are systematically processed. Proposals have to satisfy different criteriaat each stage of the decision-making process before they receive funding. In thevast majority of cases, applications are rejected by the fund managers. In addition,the length of time taken by the fund managers in appraising propositions can lead tothe withdrawal of applications at an advanced stage.