...reveal utility trade-offs between team characteristics and thus provide answers to questions such as "What strength does it take to compensate for weakness in characteristic A?" Moreover, our analysis reveals that novice VCs tend to focus on the qualifications of individual team members, while experienced VCs focus more on team cohesion. Data were obtained in a conjoint experiment with 51 professionals in VC firms and analyzed using discrete choice econometric models.

Introduction

Research into the criteria venture capitalists use to assess venture proposals began in the 1970s and has been of constant interest to scholars until the present (Franke, Gruber, Harhoff, & Henkel, 2006; MacMillan, Siegel, & Subba Narasimha, 1985; MacMillan, Zemann, & Subbanarasimha, 1987; Muzyka, Birley, & Leleux, 1996; Poindexter, 1976; Shepherd, 1999; Tyebjee & Bruno, 1984; Wells, 1974). Three reasons seem to explain the strong interest that this field of research has attracted. First, knowledge on VC evaluation criteria helps those seeking funds to better judge their own venture project and to avoid potential flaws in their proposals. Second, the findings provide members of the VC community with an aggregate view of the evaluation criteria in use and with an empirical basis for comparing their own judgment to that of their peers. And third, as VCs are considered experts in identifying promising new ventures, their evaluation criteria are often interpreted as success factors for emerging firms (Riquelme & Rickards, 1992; Shepherd & Zacharakis, 2002).

The evaluation of venture proposals is one of the key activities of VCs. Previous studies indicate that VCs use various criteria to assess the attractiveness of venture projects, such as market growth and size, product offerings, the expected rate of return, and the expected risk of a venture project (MacMillan et al., 1985; Tyebjee & Bruno, 1981). Prior research also shows that among the set of evaluation criteria, VCs place particular importance on criteria related to the start-up team (Diaz de Leon & Guild, 2003; Gorman & Sahlman, 1989; Muzyka et al., 1996; Poindexter, 1976; Shepherd, 1999; Silva, 2004; Smart, 1999; Tyebjee & Bruno, 1981; Wells, 1974; Zopounidis, 1994). As a popular saying in the VC industry highlights, VCs would rather invest "in a grade A team with a grade B idea than in a grade B team with a grade A idea" (cf. Bygrave, 1997).

Although the qualifications of the start-up team play a major role in VCs' evaluations, knowledge of the criteria used in team evaluations remains on a fairly general level. This is largely due to the fact that most prior studies investigate the evaluation of complete venture proposals and thus provide aggregate criteria rankings such as (1) technical education, (2) new venture experience, and (3) focus strategy (e.g., Shrader et al., 1997). Whereas such results are important to obtain an overall understanding of VCs' evaluations of venture proposals, they are necessarily limited in the depth of insight they can offer on team evaluations. Specifically, the existing results do not yet provide information on the importance of different parameter values for particular team characteristics. For example, if new venture experience is an important criterion, is it desirable that all team members possess such experience? Moreover, the existing results cannot reveal utility trade-offs among different team characteristics. If a team lacks industry experience, which potential strengths may compensate for such a shortcoming? Can it be offset at all, or are shortcomings in this regard a potential knock-out criterion? Hence, a more detailed understanding of team evaluation criteria is required.

Recent research by Shepherd, Zacharakis, and Baron (2003) suggests a second important extension to prior scholarly work on VC evaluation criteria. Drawing on cognitive theory, these authors find that the experience of VCs has a significant influence on their decision making. Because the assessment of team quality plays an important role in VCs' decision making, the evaluation of start-up teams may also be subject to experience effects. Prior research has not yet addressed this question, although knowledge on the existence and direction of any experience effects would be crucial to theory development on VC decision making, to the design of future research studies, and also to VC practice and venture teams.

Against this backdrop, the purpose of this study is twofold: First, we seek to provide a more detailed exploration of VCs' evaluations of start-up team characteristics, and second, we explore whether novice and experienced VCs attach differing importance to these criteria. We apply a conjoint approach that allows an experimental variation of team characteristics. Prior research suggests that conjoint analysis is particularly suitable for research on VCs' decision making (Shepherd & Zacharakis, 1999) as it yields more valid results than the more frequently used post hoc methodologies (e.g., questionnaires using Likert-type scales). Our sample consists of 51 VCs who were asked to rank 20 teams described in terms of seven characteristics. We analyze the rankings with discrete choice econometric models.

This paper proceeds as follows: In the next section, we review prior studies on the criteria used by VCs when evaluating start-up teams and draw on cognitive theory to argue why VC experience could be an important moderator variable. We then provide an overview of the conjoint research design used in this study and present our empirical findings. We conclude by outlining the implications of our results for research and practice.

Review of Prior Research

Criteria Used by VCs to Evaluate Start-Up Teams

As mentioned in the previous section, research into the criteria VCs use to assess venture proposals has a relatively long tradition. Yet the more specific question of "How do VCs evaluate start-up teams?"--which could provide more detailed insights--has received only little attention to date, leading scholars to call for focused research on VCs' evaluations of start-up teams (Siegel, Siegel, & MacMillan, 1993; Timmons & Sapienza, 1992). We briefly discuss the results of key studies investigating VCs' evaluations of venture proposals and distill their findings on those criteria that are related to the evaluation of start-up teams.

Table 1 provides an overview of prior research into the criteria VCs employ when assessing venture proposals. In this context, two observations seem to be noteworthy. First, the table shows that a wide variety of evaluation criteria have been suggested by the literature. In essence, however, it seems that they can be collated into four major groups, namely evaluation criteria related to (1) the product/service offering; (2) the market/ industry; (3) the start-up team; and (4) the financial returns to be expected from the new firm. This observation is mirrored in the findings of Tyebjee and Bruno (1984), one of the most widely cited works in this area, which identified five basic evaluation criteria used by VCs: market attractiveness, product differentiation, managerial capabilities, environmental threat resistance, and cash-out potential.

Second, we see that--although the existing results are somewhat heterogeneous--VCs consistently rank criteria related to the start-up team among the top three evaluation criteria. This result is already evident in the pioneering study by Wells (1974), who found that management commitment, products, and markets were the key evaluation criteria in the VC decision-making process. The results from the large number of studies that followed show that at least one, but often two or even all three of the top-ranked criteria pertained to characteristics of the start-up team. For example, Muzyka et al. (1996) find that (1) the leadership potential of the lead entrepreneur; (2) the leadership potential of the management team; and (3) the recognized industry expertise in the team were most important in VCs' evaluations of venture proposals. MacMillan et al. (1985) also investigated criteria that would disqualify a venture proposal. Again, the quality of the start-up team was key, as 5 of the 10 most frequently rated criteria were related to the human capital base of the venture. The most recent findings stem from a field study by Silva (2004), which did not provide an explicit ranking of criteria yet highlighted the fact that the attention of VCs is heavily focused on assessing the quality of the start-up team.

The available evidence thus indicates that evaluation criteria related to the start-up team are of major importance in VCs' decision making. More specifically, characteristics that are frequently mentioned by VCs as desirable features of start-up teams are industry experience, leadership experience, managerial skills, and engineering/technological skills. However, a consideration of existing findings also shows that current knowledge on VCs' evaluations is still rather general, a critique that has also been voiced by other scholars (Muzyka et al., 1996; Sandberg, Schweiger, & Hofer, 1988; Shepherd & Zacharakis, 1999). First, we still lack knowledge on the importance of different parameter values of particular team characteristics. For instance, relevant parameter values for the characteristic "educational background" might be (1) all team members have management education; (2) some have management education/some have engineering education; and (3) all have engineering education. Similarly, relevant parameter values for "industry experience" might be (1) all team members have industry experience; (2) some have industry experience; and (3) none have industry experience. However, the available results do not reveal the relative preference VCs attach to these parameter values. Second, the existing results cannot reveal utility trade-offs between different team characteristics. For example, if a team lacks leadership experience, which potential strengths might compensate for such a shortcoming?

In summary, as knowledge on the parameter values of particular team characteristics and on trade-offs between different team characteristics is key to understanding VCs' evaluations of start-up teams but still lacking, the first goal of this paper is to provide a focused exploration of team evaluation criteria.

The Role of Experience in VC Decision Making

A recent study by Shepherd et al. (2003) suggests a second important extension to research on VCs' evaluations of venture proposals in general and the evaluation of start-up teams in particular. Drawing on cognitive theory, Shepherd et al. find that the experience of VCs has a significant impact on their decision making. As the evaluation of human capital "has to do with making projections of future behaviors that human capital is likely to perform" (Smart, 1999) and human capital is one of the most important but difficult areas to assess in venture proposals (Kozmetsky, Gill, & Smilor, 1985), novice and experienced VCs may differ in their evaluation of start-up teams.

Cognition research provides valuable insights into the development of expertise in decision making. To arrive at a judgment, decision makers select, combine, and evaluate information cues (Spence & Brucks, 1997). The way in which information cues are processed is influenced by an individual's cognitive structures (schemata). A schema is an organized network of knowledge that includes concepts, facts, skills, and action...

NOTE: All illustrations and photos have been removed from this article.



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