Dr. Galit Klein
Decision making rules that VC's apply while evaluating new ventures
VC's evaluation process was in the center of research for the last decades; however we still do not fully understand how VC's evaluate new ventures. Some attribute this absence to methodological problems (Petty and Gruber, 2011), but it can also result from the discrepancy between focusing on evaluation's criteria, while ignoring decision making theories. While many scholars have investigated how VC's judge companies, most of them have explored it through strategic prism, and searched for criteria that investors evaluate before reaching a decision (Tyebjee and Bruno, 1984; MacMillan et al, 1985; Khan, 1987; Zacharakis and Meyer, 2000). However, assessing ventures is more then a strategic process. It also evolves psychological and cognitive aspects that needs to be taken into account while decipher the pattern of assessment. This insight has been raised in the last years (Maxwell et al, 2011) though there is still a need for more studies that will follow and reveal the decision making rules that investors apply while evaluating new ventures.
The current study extended prior literature by discussing the decision-making rules that investors apply before reaching a decision. From interviews conducted with Venture Capital managers, it has been apparent that the process of evaluation is hierarchical, and during which, the investors apply different decision making rules, both compensatory and non-compensatory, across the different stages of the process. Figure 1 illustrates the model that was founded in the study.