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How Venture Capitalists Make Decisions

An inside look at an opaque process by Paul Gompers, Will Gornall, Steven N. Kaplan, and Ilya A. Strebulaev, from Harvard Business Review - March–April 2021


The authors from this excellent research paper surveyed 900 venture capitalists and followed up with several dozen interviews, making their survey of VCs the most comprehensive to date. For those of you who don’t have time to read the whole article and prefer to look at pictures, I made graphs and tables of some of their findings.


Surprising findings

  • Most deals come from contacts that were initiated by the VCs, instead of entrepreneurs approaching the VCs.

  • Only 1% of the considered opportunities materialize into a deal

  • Founder team quality is most important factor, over product, market, IP, valuation

  • Expected exit value multiple (value increase of the shares they buy when they sell these to others after 5-7 years) is more important than sales and profit forecast

  • VCs have a lot of interaction with “their” startups, meeting them on a weekly basis. But this involvement is not an important success factor. Instead, “The winners always seem to be the founders who can build a kick-ass team”

  • VC funds perform on average only 5% better than the S&P 500 and roughly 40% do not even beat the S&P 500.

Where do VC deals originate from?

Selection Process

For each deal a VC firm eventually closes:

Important factor in decisions to pursue deals

VC post-investment services

This summary was also posted on LinkedIn on 4 May 2021.

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