Objectives

Maximize entrepreneurial dedication

To ensure an entrepreneur’s management team is committed to the success of the new  venture, VCs need to be able to effectively assess their dedication and commitment. For example, the capacity for sustained and intense effort is particularly important for ventures operating in established markets, where competition is strong and there are few possibilities to protect the products through patents (Dubini, 1989). Equally important is the dedication of the employees and their motivation to complete projects necessary for success. Erikson (2002) found commitment tends to decrease with age, and those who are younger often may be strong on commitment. As such, an entrepreneur’s team must be properly balanced to include younger team members.

Maximize benefits realization from emerging technologies

VCs wish to fully understand the emerging technology in which they intend to invest and the potential alternative technologies. They need to ensure there are socioenvironmental benefits as well as financial benefits for the emerging information technology. Additionally, the emerging technology may need enabling government regulations in order for the benefits to be realized (Fisher and Harindranath, 2004).

Maximize socialized network investments

Often VCs prefer to rely on their social networks to find an emerging technology firm in which to invest. Shane and Cable (2002) found “social ties provide a mechanism by which investors obtain information.” Sharing investment opportunities within socialized networks generate future investment opportunities, allows VCs more latitude in choosing which opportunities to invest in, which investment options to forego, and it helps VCs to maximize opportunities for future networking. Individuals prefer to share information with peers, as this helps in identifying investments from socialized networks. Also, there is typically a greater level of trust between individuals in the same social circles, which leads to lower transaction cost for VCs during the validation process. Therefore, VCs are more likely to investment within their own socialized network, which also leads to future opportunities.

Maximize understanding of venture’s operational climate

VCs seek to understand a new venture’s supply chain and distribution channels, since they affect enterprise’s growth and success. Covin et al. (2000) found certain distribution channel decisions (e.g. relative control over distribution channel members and relative number of distribution channels employed) are differentially related to firm growth. Additionally, understanding the weaknesses and strengths of an operation makes an investment decision easier. Also, a venture’s business plan needs to have a well-defined timeline, so VCs can determine if the venture’s timeline matches their own investment goals. A clear understanding of the operational aspects cannot be underestimated. While venture capital for existing technologies and businesses certainly presents the opportunity to engage in a careful review, in situations where an entrepreneur or a VC is entering into a totally new field, such evaluation is difficult.

Define Venture Capitalist’s Exit Strategy

The VC’s exit strategy is designed to provide an optimal return on investment and provide opportunities for continued investment. It is necessary to invest in emerging technology ventures whose leaders have similar exit strategies. To ensure exit strategies are aligned, VCs often prefer to have effective contractual control rights (Cumming, 2008), and as a result of exercising these rights, the VCs increase the probability of their preferred exit strategy. This also allows VCs to consider future opportunities for continued investment and keep their investment pipeline filled with potential opportunities.

Maximize understanding of venture’s technological innovations

VCs wish to understand the technological innovations entrepreneurs have developed before committing any investments into a venture. Of particular interest is when an innovative technology has the capability of becoming a “disruptive technology” and can possibly displace an incumbent technology. In order to assess the opportunities available to new emerging technologies, an understanding of possible impediments to the technological innovations is required before a VC can make a fair prediction of a specific technology’s potential impact on the existing market.

Additionally, to measure this impact on the existing market, VCs need to have a well-defined understanding of whether the emerging technology is a disruptive or sustaining technology innovation. An analysis of path dependency will allow the VC to understand the critical chokeholds that might exist within the new venture’s operations, and be able to decide if an entrepreneur is capable of controlling these critical points effectively to ensure success of the venture.

Ensure the emerging technology venture is well-designed

VCs should also understand a new venture’s organizational structure. Having specifically defined reporting and feedback mechanisms in place, which are aligned with the proposed organization structure, helps create positive and innovative cultures within an organization, and allows for a successful new venture. A venture’s governance or culture may restrict a response to a threat (Clemons et al., 1996). Understanding a venture’s structure, governance, and culture allows VCs to validate the entrepreneur’s emerging technology ideas

Maximize Venture Capitalist’s investment return in emerging technologies

Maximizing return on investment (“ROI”) while minimizing risk is the goal of venture capitalism. Even so, a “VC expects to take the heavy risks involved in new ventures, but also expects to be rewarded accordingly” (Curley, 1992). To evaluate and understand the opportunity costs associated with a specific project, there is need to compare ROIs of different projects and the risks associated with each project. Understanding the emerging information technology venture’s break-even point further clarifies the return on investment potential of the venture.

Maximize stakeholder involvement in emerging technology venture

In this objective is embedded the knowledge that multiple stakeholders are affected and influenced by emerging technology in different ways. Multiple constituencies are diverse stakeholders (Voss et al., 2005). As such, VCs need to understand how an entrepreneurial team manages dissimilar stakeholders, which stakeholders influence the entrepreneur, the most, and in what ways. It is possible for individual stakeholders to have alternative interests, which could be detrimental to a venture. It is important to identify reasons stakeholders are investing in an emerging technology, in order to ensure the common investment goals align with each other.

Maximize clarity of entrepreneur’s decision-making

This objective addresses the need for VCs to gain an understanding of the decision-making process of an entrepreneur, as it relates to a venture. “Given the social and economic relevance of creating new businesses, it is important to understand how market entry decisions are made, what factors influence individuals who make these decisions, and what kinds of errors these individuals are likely to make” (Koellinger et al., 2007).  When VCs understand the patterns in an entrepreneur’s decision-making process, there is more confidence in the entrepreneur and fewer surprises for VCs.

Minimize risks for emerging technology

While the entrepreneur is marketing the emerging information technology for its innovative characteristics, it is important to understand the possible disadvantages of an emerging technology. A full comprehension of the emerging technology will allow VCs to understand what is necessary to launch a successful emerging technology venture, sustain the venture for at least the term required to receive return on investment, and potential alternative technologies that may compete in the same market. In order to perform a risk assessment, VCs need to first identify detriments of the emerging technology. This includes developing a deep understanding of key operational issues along the lines of market threats and operational weaknesses. A good understanding of the required inertia needed for launching emerging technology venture will help VCs make investment decisions.

Maximize due diligence

Due diligence is required to ensure all aspects of a business are considered before any investment decision is made (Swanson 1989). Due diligence also helps VCs ensure The Journal of Entrepreneurial Finance • Volume 17, No. 1 • Spring 2015 51 the emerging technology is not only profitable and feasible, but meets regulatory and legal requirements. This provides a level of comfort to VCs by helping them realize the venture is attainable. Additionally, VCs want the intellectual property to be properly protected, as it assures future benefits to a large extent.