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A Case Study of Qualitative Factors in Making Venture Capital Investment

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A Case Study of Qualitative Factors in Making Venture Capital Investment A CASE STUDY OF QUALITATIVE FACTORS IN MAKING VENTURE CAPITAL INVESTMENT DECISIONS by Frances Brunner, B.B.A. A thesis submitted to the Graduate Council of Texas State University in partial fulfillment of the requirements for the degree of Master of Business Administration with a Major in Business Administration May 2017 Committee Members: Alexis Stokes, Chair Jana Minifie Matthew Hood COPYRIGHT by Frances Brunner 2017 FAIR USE AND AUTHOR’S PERMISSION STATEMENT Fair Use This work is protected by the Copyright Laws of the United States (Public Law 94-553, section 107). Consistent with fair use as defined in the Copyright Laws, brief quotations from this material are allowed with proper acknowledgement. Use of this material for financial gain without the author’s express written permission is not allowed. Duplication Permission As the copyright holder of this work I, Frances Brunner, authorize duplication of this work, in whole or in part, for educational or scholarly purposes only. DEDICATION I am dedicating this thesis to my children Ashton, Saffron, Cinnamon, Collin, and Sage, that they may take this as an inspiration to overcome fears and challenges, to push past perceived boundaries and reach great things in life. ACKNOWLEDGEMENTS I would like to thank my husband, Stefan, who supported my decision to take a break from the corporate world to pursue my dream of earning a Master in Business Administration. I would like to thank my children Sage, Collin, Cinnamon, Saffron, and Ashton who were patient and endured long hours waiting for me to finish interviewing, researching, and writing. I especially would like to thank my chair Dr. Alexis Stokes and my co-chairs Dr. Jana Minifie and Dr. Mathew Hood for their mentoring and advocacy that has surpassed the pages of this thesis, and has made a lasting impact in my life and future. v TABLE OF CONTENTS Page ACKNOWLEDGEMENTS ................................................................................................ v LIST OF ABBREVIATIONS .......................................................................................... viii ABSTRACT ....................................................................................................................... ix CHAPTER 1 BACKGROUND .................................................................................................... 1 1.1 Prologue .......................................................................................................... 1 1.2 Current Economic and Political Climate ........................................................ 2 1.3 Statistics on Venture Capitalist Activity in the United States ........................ 3 1.3.1 Venture Capital ....................................................................................... 3 1.3.2 Angel Investment .................................................................................... 5 1.3.3 Crowdfunding ......................................................................................... 5 1.3.4 Statistics on Venture Capitalist Activity in Austin ................................. 7 1.4 Reason for Thesis ............................................................................................ 8 1.5 Methodology ................................................................................................... 9 2 INTERVIEWS ...................................................................................................... 11 2.1 Purpose of Questions .................................................................................... 11 2.2 Interview Questions and Explanations.......................................................... 12 2.3 Description of Participants ............................................................................ 15 2.4 Similarities and Differences Between Interview Participants ...................... 18 2.5 Interview Responses ..................................................................................... 20 vi 3 RESULTS ............................................................................................................. 52 3.1 Time is Worth More than Money ................................................................. 52 3.2 Venture Capitalist Perceived Value .............................................................. 53 3.3 Venture Capitalists Are Not Sole Decision Makers ..................................... 54 3.4 Reasons for Positive and Negative Precursors to Entrepreneurial Failure ... 55 3.5 Indicators of Entrepreneurial Success: Timing ............................................. 56 3.6 Indicators of Entrepreneurial Success: Network........................................... 56 3.7 Character Traits ............................................................................................. 57 4 DISCUSSION ....................................................................................................... 58 4.1 Time is a Discriminating Factor ................................................................... 58 4.2 More Likely to Get Funded if Referred ........................................................ 59 4.3 Wolf Pack...................................................................................................... 60 4.4 Lone Wolves ................................................................................................. 60 4.5 A Venture Capitalist’s main resource is not capital...................................... 61 4.6 Failure is like Kryptonite .............................................................................. 62 4.7 Qualitative Ingredients for Entrepreneurial Success..................................... 63 5 EPILOGUE ........................................................................................................... 65 5.1 Insights and Recommendations from the Experts ........................................ 65 5.2 Insights and Recommendations from the Venture Capitalists ...................... 65 APPENDIX SECTION ..................................................................................................... 67 BIBLIOGRAPHY ........................................................................................................... 107 vii LIST OF ABBREVIATIONS Abbreviation Description Biz dev Business Development IPO Initial Public Offering Med-tech Medical Technology M&A Mergers & Acquisitions SaaS Software-as-a-Service SME Subject Matter Expert VC Venture Capitalist viii ABSTRACT When a startup requires large capital backing, it can expect to seek out the venture capitalist. Understanding the process and priorities of the venture capitalist is necessary to gain funding approval on more than just a good business plan, a positive revenue model, or being a likeable person. This study gives a current view of the modern venture capitalist and the elements of their decision making for the edification of entrepreneurs in the funding stage, to understand and avoid pitfalls of their presentation and unspoken communication for nonfinancial components of their business persona. Five interviews have been conducted with venture capitalists residing in the Austin area and two interviews with subject matter experts (SMEs) who have been directly influenced and are consultants in venture capital decision making. These individuals have shared their experiences and methodologies in finding inimitable opportunities for high growth ventures. An explanation of venture capital review methods is presented, followed by a case study and summary of commonalities and contradictions between interview outcomes. ix 1 BACKGROUND 1.1 Prologue Venture capital funding accelerates businesses by giving entrepreneurs the means to scale ideas and develop more quickly than through organic growth. However, entrepreneurs who need funding to fuel accelerated success are often denied by venture capitalists (VCs). The question is, what factors matter, and are these the most obvious factors? Traditionally, investment decisions are made based on quantitative numbers such as revenue growth, addressable market, and profitability. By the very nature that highly innovative startups are also considered high risk and are venturing into unknown territory, quantitative factors are not sufficient measures for the future success of a company and therefore necessitate the investment of venture capital. This means that venture capitalists have to base their investment decisions mainly on qualitative factors. The question is what are these qualitative factors and to what extent can the entrepreneur influence these? Does a common set of favorable factors exist? In this thesis, I am conducting a case study with a small set of selected venture capitalists to capture the diversity of decision making. My thesis is, that there is no common set of decision factors, perhaps overlapping factors that are more common, and others that are uniquely dependent on the decision makers, their background, and experiences from past investments. 1 Therefore, the focus will be on qualitative evaluation factors. 1.2 Current Economic and Political Climate Within the last five years, the economy has been steadily strengthening from its lows during the Great Recession that peaked in 2006. In 2016, unemployment was close to a low since 2007. Consumer confidence is steadily improving. 2016 was dominated by the presidential election. After being in office for two terms, President Barack Obama handed over his office to Washington outsider, entrepreneur and entertainer Donald Trump, who introduced both hope
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