Honors Capstone Project
Date of Submission
Dr. David Wilemon
Dr. Peter Koveos
Capstone Prize Winner
Won Capstone Funding
Corporate Finance | Entrepreneurial and Small Business Operations
This paper discusses the areas and methods by which venture capitalists need to concentrate their efforts when assessing the attractiveness of an investment. The information is additionally valuable for entrepreneurs seeking funding to expand their businesses and academics researching the topic. A series of books, trade journals, articles and interviews were referenced in an effort to present a thorough and unbiased investigation of the topic. The research is significant given that private equity has remained an understudied area in comparison to larger public equity markets. Additionally, the traditionally shorter periods of operating history of private companies add a layer of difficulty to predicting future performance not present in public equities. First, the characteristics of the high-growth businesses best suited for venture capital funding are discussed. The structures present in the industry and its boom and bust cycle over the past ten years are covered. Finally the fact and fiction in pervasive rumors about venture capital, such as a funding bias towards high-tech startup companies and the general difficulty of getting funded are discussed. The second section covers the recent trends towards international venture capital investments and lower levels of investment liquidation through initial public offerings, primarily in favor of mergers and acquisitions. The next section covers the best practices in screening prospective investments. The value of referrals, especially from a VC’s trusted inner-circle, is explained. Additionally, screening companies based on desired industries, geographic locations, and growth stages are discussed. Finally, eliminating prospective investments based on business plan quality, the quality of other investors and the reputation of business associates is covered. Next, the process of assessing the management team, considered the most critical aspect of an investment by many VCs, is discussed. Suggested questions for references are presented along with methods to conduct interviews and assess management team member’s integrity and ethics. Making use of trusted sources and psychological tests to determine the completeness of the executive team and their level of preparedness are covered. Finally, recommendations for assessing the commitment and value of board members are discussed briefly. The section on assessing the business includes research on how to determine the strength and fit of an entrepreneur’s product or service with a market need. The market represents the other aspect of due diligence that some VCs argue is more important than the management team. Lastly, methods for assessing the operational performance of the business are covered. The next section of the paper covers major issues in finalizing an investment. The key legal issues and primary method for valuing a firm are discussed. Lastly, the summary and conclusion restates the main points of the paper and recommends VCs begin to adapt their due diligence process to accommodate increasing levels of international investments and exits through methods other than US public equity markets.
Jordan, Nick, "Venture Capital Due Diligence: Issues & Processes" (2006). Honors Capstone Projects - All. 633.
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