The Main Decision Criteria VC Firms Use to Pursue Deals

Venture Capital
Knowledge Center


New Topic

Jaap de Jonge
Editor, Netherlands

The Main Decision Criteria VC Firms Use to Pursue Deals

🔥NEW In a paper, Julius Smit examined 3 different theories to understand how venture capitalists use investment criteria in their decision making process of funding a startup:
  • According to theory around the investment process, certain investment criteria are used in the pre-deal phase, in the screening and evaluation phase.
  • According to theory about venture capital investment criteria, these can be distinguished into 5 categories: (1) the entrepreneur/team characteristics, (2) characteristics of the products/services, (3) market characteristics, (4) financials and (5) other characteristics. The entrepreneurial/team characteristics are the most important.
  • According to theory on individual decision making like MBTI, it is clear that there are major differences in the way people take in information and make decisions.
More recenly, Prof. Gompers et al. published more quantitate findings about how Venture Capitalist firms (VC firms) are deciding on deals (firms) to consider for investment (I) and actually buy into (II):
  1. CREATING A FUNNEL - To find potential deals / firms requiring VC funding and continuously generate a deals flow, VC's like to remain in the background and focus on their network (colleagues, former colleagues, trusted investors, other entrepreneurs, professors) rather than extensive research.
  2. ACTUAL INVESTMENT - What are the most important factors VC firms consider when deciding which deals to actually invest in?
    1. Founders (mentioned by 95% of VCs interviewed). They are by far the most important factor. In particular their ability to build a superb management team is regarded as crucial for the success of the venture and the rewards for the VC.
    2. Strategy and business model (74%).
    3. Market (68%).
    4. Industry (31%).
    5. Valuation. VC's focus on finding firms that have a potential for a big exit (multiplying the original investment many times), rather than on cash flow predictions.
⇨ What are your ideas on assessing startup funding opportunities? You are cordially invited to share your comments.
Smit J. (2018), "How do venture capitalists use investment criteria in the decision making process of funding a startup?", Working Paper.
Gompers P., Gornall W., Kaplan S.N., Strebulaev I.A., "How Venture Capitalists Make Decisions", HBR Mar-Apr 2021, pp. 70-78
. 1-6-2021

Participate and leave a comment
Exchanging your ideas stimulates your personal and professional development. And you can help other people! Please motivate your point of view. You can still edit your comment for 3 hours.

Start a new forum topic


More on Venture Capital
Acquiring Venture Capital: Financing Preferences of Startups
Quotes on Venture Capital. Quotations
Crowdfunding Tips and Advice
The Main Decision Criteria VC Firms Use to Pursue Deals
Misconceptions of Entrepreneurs About Venture Capitalists
Best Practices
Customer-funded Business Models
Bootstrapping Methods: Non-external Financing Strategies Applied by Start-ups
Special Interest Group

Are you interested in Venture Capital? Sign up for free

Notify your students

Copy this into your study materials:

and add a hyperlink to:

Link to this discussion

Copy this HTML code to your web site:

Venture Capital
Knowledge Center

About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
2021 12manage - The Executive Fast Track. V15.8 - Last updated: 13-6-2021. All names of their owners.