What do entrepreneurs want from venture capitalists? A new Cornell study by Ola Bengtsson (now an assistant professor of finance at University of Illinois Urbana-Champaign) and Frederick Wang looked at the stated preferences of entrepreneurs as expressed in comments and ratings on VC-ranking site The Funded. The study, which is based on opinions from roughly 1,500 entrepreneurs about 526 U.S. venture capital firms, tries to assess what they value the most from VCs.
In general, entrepreneurs view independent venture capital firms more favorably than strategic, corporate, or government VCs. They do a pretty good job of identifying which VCs have the best track record (which Bengtsson checked against VentureEconomics data), but just because a VC has a good financial track record doesn’t mean he or she will be the most helpful. And one of the things entrepreneurs value the most from a VC is quick feedback (positive or negative) when they are doing due diligence because time is money, and startups don’t have much of either.
Bengtsson shares some of his conclusions:
1. Entrepreneurs can correctly identify which VCs have the best historical track record but they do NOT perceive these investors to be more able to add value pre- and post-investment. This result is surprising but found in my analysis of more than 1,500 unique entrepreneurs and 500 VCs.
2. Entrepreneurs view private partnership (independent) VCs more favorably than other VC affiliated with corporations, financial institutions or government agencies. Thus, independence is good.
3. Entrepreneurs who have interacted with more VCs have a less positive view of these investor’s ability to add value pre- and post-investment. This suggests that entrepreneurs learn over time that each VC is less unique and useful.
4. Entrepreneurs like when VCs conduct fast due diligence and give feedback on the business plan. Time is a scarce luxury when you run a startup.
5. Many entrepreneurs express concerns that some VCs have tensions within their organization/partnership. The entrepreneur may like the VC partner he meets but turns down the VC because of potential internal conflicts.
Bengtsson admits that there is a potential for selection bias in his study since the data comes from entrepreneurs who choose to be vocal about their opinions on The Funded. But he also points out that “they at least reflect how an important population of entrepreneurs evaluate the VCs they have encountered” and that when he dug into the data he didn’t find an unusually negative or positive bias. More importantly, the study tries to make conclusions about how preferences differ for different types of VCs. If The Funded attracted overwhelmingly negative entrepreneurs, that wouldn’t explain ehy they prefer independent VCsand private equity partnerships (PEPs) over corporate VCs or their ability to correctly asses a VC’s track record. The study is embedded below.
The inability for most VC’s to add value is really a big issue and cannot be swept under the rug. Very few VC’s have the time or background to truly be able a company run their business better.
Entrepreneurs need to take the bull by the horns and view VC’s as money, plain and simple. If they have a solid idea from time to time then think of that as gravy, but do not expect miracles because they don’t happen in real life.
Lots of cash with as few strings as possible is what entrepreneurs want. Then connections and deeper pockets.
Great study. Validates some of our findings and discussion at the TechAviv Founder-VC Town Hall meeting last month. PPT attached:
http://bit.ly/17rjs1
Wonderful report, I wish that both sides will profit from it!
a useful study..thanks
The most annoying is that the majority of VC’s do NOT even bother to reply their emails.
I tell you who BOTHERS TO REPLY… it’s John Doerr and Michael Moritz… now wonder they’re tops!!!! It’s a bloody excuse not to reply (i have to filter thru 300 emails a day each day). If you’re not going to reply, then don’t bother handing out business cards with your email there.
But somehow i agree with the findings. Time isn’t on our side… as the clock ticks, our funds are drying up on a daily basis and thus the need for VC’s to give us a Yes, No, KIV or Next Time within a reasonable timeframe.
Make these start ups pay you… Stop taking chump change from them and working on plywood tables.. This bohemian business culture is for the birds… .
You need to pay to play, buy some office furniture will ya?
Wallace Stegner summed up Western pioneers’ attitude towards the government: “Get out, and give us more money.”
Love this…
“Such systematic differences could, however, be biased if some VCs were to try to strategically game the rankings and comments by asking entrepreneurs in their portfolio companies to anonymously submit favorable evaluations.”
Hmmm …
So basically, if you back out forced positive reviews by VC portfolio companies undetected by theFunded (I assume a lot of them) I’m wondering how that would skew the results.
I’m thinking very significantly.
Related study on the data behind Angel Investment decisions (link below). I think we’re seeing the industry start to shift from pure finance to more of the incubator model. I disagree that VCs don’t add value to a company, but it it certainly true that some are more creatively helpful than others.
http://www.slid...-report-q2-2009
The bias note is appropriate. How many entrepreneurs have time to lodge complaints on Citysearch, Yelp, etc… let alone The Funded?
It reminds me of a sample derived from a returns and exchanges desk at a retail operation. People don’t walk up to extol the virtues of the personal shopping experience.
This just in from academia: people prefer breathing oxygen over carbon dioxide.
I am not surprised.
yeah neither am i and neither is anyone i guess, but it’s still good to see numbers and an actual research with some methadology. it helps to put vivek’s vc’s and innovation post into perspective.