Van De en e , B.; Mlambo, C.
A icle
Fac o s in luencing en u e capi alis s' p ojec inancing
decisions in Sou h A ica
Sou h A ican Jou nal o Business Managemen
P o ided in Coope a ion wi h:
Uni e si y o S ellenbosch Business School (USB), Bell ille, Sou h A ica
Sugges ed Ci a ion: Van De en e , B.; Mlambo, C. (2009) : Fac o s in luencing en u e capi alis s'
p ojec inancing decisions in Sou h A ica, Sou h A ican Jou nal o Business Managemen , ISSN
2078-5976, A ican Online Scien i ic In o ma ion Sys ems (AOSIS), Cape Town, Vol. 40, Iss. 1, pp.
33-41,
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Fac o s in luencing en u e capi alis s’ p ojec inancing decisions in
Sou h A ica
B. an De en e and C. Mlambo*
Uni e si y o S ellenbosch Business School,
PO Box 610, Bell ille 7535, Republic o Sou h A ica
[email p o ec ed]
Recei ed Augus 2008
This s udy explo es and iden i ies he in es men c i e ia used by Sou h A ican en u e capi alis s in hei en u e
sc eening and e alua ion p ocesses. Using a Like scale ype o ques ionnai e, Sou h A ican en u e capi alis s (VCs)
we e asked o a e he in es men c i e ia iden i ied in simila s udies ab oad and o epo any addi ional c i e ia o hei
own. By e alua ing he mean a ings, i was ound ha Sou h A ican VCs conside he en ep eneu ’s hones y and
in eg i y; a good expec ed ma ke accep ance; and a high in e nal a e o e u n (IRR), o be he h ee mos impo an
c i e ia. The Sou h A ican VCs, jus like hei o e seas coun e pa s, ega d managemen conside a ions o be he mos
impo an c i e ia g oup in he e alua ion o new in es men p ojec s. The esul s o his s udy a e deemed use ul o bo h
en u e capi alis s in hei decision-making p ocess and o en ep eneu s in hei en u e capi al applica ions o maximise
hei success a e.
*To whom all co espondence should be add essed.
In oduc ion
Ven u e capi al is a majo sou ce o unding o he
en ep eneu ial communi y and usually ocuses on ea ly
s age, mo e isk-o ien a ed, p e-ini ial public-o e ing
business endea ou s. Typically, unds will be aised and
in es ed in a numbe o di e en oppo uni ies.
En ep eneu s usually s a and un on a shoes ing budge
and will seek en u e capi al once hey a e in a posi ion o
expand hei businesses. Ven u e capi alis s seek hese high-
isk and high- e u n oppo uni ies whe e he e is usually an
exchange o equi y o cash.
When en u e capi alis s decide o in es in a p ojec , hey
make use o bo h quan i a i e and undamen al/quali a i e
me hods. Quan i a i e alua ion me hods can, in some cases,
p o ide hem wi h a ealis ic alue and indica ion o
p oduc i i y. Howe e , he lack o e enue and inancial
pe o mance da a, ha usually accompanies a new en u e,
can ende hese me hods less e ec i e. Quali a i e
indica o s a e mos ly om he school o s a egy and a e
used o gauging s eng hs and weaknesses.
The impo ance o in es men decision c i e ia becomes
ob ious wi h he ac ha mos en u e capi al i ms a e
ope a ed by a lean s a and ha hey a e inunda ed wi h
p oposals ha become a signi ican bo leneck in hei
ope a ions (La sson & Roos all 2000:21). This will ha e an
e ec on p oduc i i y since much o hei ime will be spen
e alua ing and ejec ing lawed p oposals (MacMillan,
Siegel and Subba Na asimha, 1985).
F om he li e a u e, i is e iden ha he c i e ion ha ca ies
he mos weigh in he en u e capi al decision-making
p ocess is ela ed o he en ep eneu , his pe sonali y,
in eg i y and expe ience. As s a ed by MacMillan e al.
(1985:119) “ The e is no ques ion ha i espec i e o he
ho se (p oduc ), ho se ace (ma ke ), o odds ( inancial
c i e ia), i is he jockey (en ep eneu ) ha undamen ally
de e mines whe he he en u e capi alis will place a be a
all.” MacMillan, Zemann and Subba Na asimha (1987) also
ound he ex en o compe i i e ba ie s and ma ke
accep ance o be o signi icance.
The s udy p oceeds as ollows. Sec ion 2 summa ises he
key li e a u e in en u e capi al decision-making. Sec ion 3
desc ibes he da a collec ion p ocess and p esen s he
esea ch design and me hodology. Sec ion 4 analyses he
da a and epo s he esul s. Sec ion 5 summa ises and
concludes he pape .
Re iew o ela ed li e a u e
Acco ding o Gompe s & Le ne (2000:4-5), he ole o a
en u e capi alis is no hing new in ha en ep eneu s ha e
long had ideas ha equi ed mo e capi al o implemen han
unds we e a ailable o hem. While he e ha e been some
use o bank loans o o he sou ces o deb inancing, in he
si ua ion whe e nega i e ea nings and/o no ack eco ds
exis , he uses o hese acili ies a e limi ed and o he
sou ces o inancing need o be secu ed. Ven u e capi al
ep esen s one solu ion o he inancing o hese high- isk
and po en ially high- ewa d p ojec s.
34 S.A .J.Bus.Manage.2009,40(1)
One o he p oblems o bo h en u e capi alis s and
en ep eneu s lies in de e mining he economic alue o an
en e p ise. This ep esen s one o he mo e challenging
discussions an en ep eneu can ha e wi h his in es o s
(Quindlen, 2000). The si ua ion is exace ba ed by he ac
ha he e is li le guidance on he subjec a ailable in
academic li e a u e. W igh and Robbie (1998:558) conclude
ha “li le wo k is a ailable on alua ion o en u e capi al
in es men s”.
Clea ly, he e is some di icul y in he alua ion o new
en u es. As Ge, Mahoney and Mahoney (2005:5) s a e,
“idiosync a ic cha ac e is ics o new en u es (e.g., hei
sho ope a ing his o y and limi ed accoun ing in o ma ion)
and he ine iciency o he en u e capi al ma ke p esen
undamen al heo e ical and economic measu emen
challenges o ex an inancial alua ion app oaches, which
ely hea ily on accoun ing in o ma ion ha ea ly s age new
en u es ypically canno p o ide.” Thus he in es iga ion
and iden i ica ion o non inancial me hods and ac o s ha
can be used in decision-making may p o e use ul.
While en u e capi alis s ha e been in exis ence o a long
ime, wi h some acing hei oo s back o Thalés de Mille
and la e o Vasco de Gama and Ch is ophe Columbus, he
o mal en u e capi al indus y is ela i ely young. The i s
o mal en u e capi al i m, Ame ican Resea ch and
De elopmen (ARD), was o med o y and comme cialise
he echnologies de eloped o he Second Wo ld Wa .
These include inno a ions pa icula ly unde aken a he
Massachuse s Ins i u e o Technology. Success in ARD’s
di e en in es men s a ied widely, wi h almos hal o he
company’s p o i s in he 26 yea s o exis ence as an
independen en i y coming om i s $70 000 in es men in
Digi al Equipmen Company in 1957 (Gompe s & Le ne ,
2000) Since hen, he Ven u e Capi al indus y has g own
in o a mul i-billion dolla indus y, spanning he globe and
d i ing inno a ions.
The eason why en u e capi al exis s is because o he way
ha he capi al ma ke s a e s uc u ed. An en ep eneu wi h
a new idea o p oduc o en has no o he ins i u ion o u n
o. Ven u e capi al ills he oid be ween sou ces o unds
o inno a ion (mainly co po a ions, go e nmen bodies and
he en ep eneu ’s amily and iends) and adi ional
sou ces such as banks ha supply deb o ongoing conce ns.
Fo he en u e capi al indus y o wo k, i needs o supply
in es o s o unds wi h a e u n on capi al ha is high
enough o sa is y hei appe i e o he inhe en ly highe isk
ha is associa ed wi h hese new en u es. A he same ime,
i needs o o e en ep eneu s su icien upside po en ial o
sha e and a ac high quali y ideas wi h he po en ial o
high e u ns (Zide 1998:133).
Acco ding o Zide (1998:135), he e a e ou majo
pa icipan s in he en u e capi al indus y, namely, he
en ep eneu who needs he unding, he in es o who wan s
he high e u n, he in es men banke s who need companies
o sell and he en u e capi alis s who wan o make money.
This is made possible by he c ea ion o a ma ke o he
playe s men ioned.
Tyebjee and B uno (1984:1052) sugges ed a model o a
en u e capi alis ’s in es men ac i i y con aining i e s eps.
The i s s ep is deal o igina ion, whe e he en u e capi alis
becomes awa e o po en ial in es men ac i i ies. This is
ollowed by he sc eening p ocess, whe e he numbe o
po en ial in es men s is limi ed o a manageable amoun .
The hi d s ep is he e alua ion p ocess, whe e he iabili y
o each sc eened p ojec is de e mined and, las ly, he deal is
s uc u ed h ough a p ocess o nego ia ion. Once he deal is
s uc u ed he e a e some pos in es men ac i i ies, such as
suppo ing he new en u e’s managemen and con ol
s uc u es o p o ec he VC’s in es men .
F ied and His ich (1994:31) c ea ed a six s aged model
simila o Tyebjee and B uno (1984:1052). The only
di e ence is ha his model includes wo sc eening and wo
e alua ion phases. One sc eening phase is en u e capi al
i m-speci ic, whe e guidelines o in es men elimina e
candida es ha clea ly do no mee he c i e ia and exclude
ce ain indus ies and geog aphic loca ions. The o he phase
is a gene al sc eening p ocess. The i s e alua ion phase is
used o de e mine he alidi y o he in es men and he
second phase is used o de e mine any obs acles o he
in es men and how hey can be o e come.
Ven u e capi al decision-making
The e ha e been se e al s udies done ying o iden i y he
di e en s ages and c i e ia o he decision-making p ocess.
S udies on he p ocesses and c i e ia used by en u e
capi alis s ha e been done by Tyebjee and B uno (1984),
MacMillan e al. (1985; 1987), F ied and His ich (1994),
Shephe d (1999), Kaplan and S ömbe g (2003), Kaka i
(2003), Ge e al. (2005) and Pin ado, De Lema and Van
Auken (2007). Acco ding o La sson and Roos all (2000:4),
he p ocess is gene ally conduc ed in such a way ha new
en u es mus i s pass an ini ial sc eening, which is
ypically a e iew o he business plan. “This is hen
ollowed by mee ings, a due diligence phase and
nego ia ions a ound he mo e de ailed issues ega ding he
in es men .”
In o de o p o ide capi al and o enable he success and
op imisa ion o in es ed unds, en u e capi al i ms use
hei decision-making p ocesses o ga he he in o ma ion
needed in o de o make a decision on whe he o ejec o
accep en u e capi al p oposals (La sson & Roos all,
2000:3). The decision o in es is a di icul one wi h se ious
ad e se selec ion isk. Acco ding o F ied and His ich
(1994:1), he main pu pose o he in es men decision-
making p ocess used by en u e capi alis s is o educe he
isk o ad e se p ojec selec ion. The pu pose is o assess he
possibili y o success o ailu e o a speci ic en u e based
on a ailable in o ma ion.
Ven u e capi alis s’ inancing decisions a e augh wi h
di icul ies because en ep eneu s possess in o ma ion abou
hei oppo uni ies and hemsel es ha po en ial inancie s
ind di icul o impossible o ob ain (Ami , Glos en &
Mulle , 1990; Ba y, 1994; Chan, Siegel & Thacke , 1990;
Gompe s, 1995). Because hese signi ican in o ma ion
asymme ies exis be ween en ep eneu s and en u e
S.A .J.Bus.Manage.2009,40(1) 35
capi alis s, i could allow en ep eneu s o engage in
oppo unis ic beha iou a e an in es men is made
(Sahlman, 1988).
“Thus, inancie s ace high isks when selec ing among
en ep eneu s because en ep eneu s may ac
oppo unis ically owa ds hem, and because en ep eneu s
a y in hei abili y o iden i y and exploi
oppo uni ies”(Shane & Cable, 2002:364). This makes i
ex emely impo an o he en u e capi alis o make he
co ec decision o in es in a speci ic p ojec in o de o
a oid isk and op imise e u ns.
By unde s anding he na u e and p ocess o VC in es men
decisions, he en ep eneu can gain om he imp o ed
likelihood o his new en u e being unded and in
nego ia ing mo e ag eeable e ms. The s age o
de elopmen , iskiness o he en u e, backg ound o he
owne , geog aphic loca ion and exi oppo uni y a e some o
he conside a ions in he en u e capi alis s’ assessmen o
he isk and e u n po en ial o a en u e (Van Auken, 2001).
Iden i ying and unde s anding hese issues and c i e ia will
enable companies o de elop be e p oposals and nego ia e
mo e e ec i ely wi h en u e capi alis s (Timmons &
Spinelli, 2004).
In es men decision c i e ia
In he in es men decision p ocess and c i e ia, he
echniques used o ga he in o ma ion include
ques ionnai es, in e iews and expe imen s. The li e a u e
can dis inguish be ween “in use” and “espoused” c i e ia.
“In use” c i e ia a e used in he en u e capi alis s’ ac ual
decision-making p ocess and “espoused” c i e ia a e hose
c i e ia ha en u e capi alis s epo ha hey use when
e alua ing a new en u e p ojec . The e is mo e endency
owa ds “in use” c i e ia in he la e esea ch, whe eas
ea lie esea ch ended owa ds “espoused” c i e ia ha we e
ga he ed by making use o ques ionnai es. Shephe d (1999)
in es iga ed c i e ia ela ed o he school o s a egy and
iden i ied he ollowing conside a ions in he in es men
decisions: Ma ke conside a ions, Compe i ion
conside a ions and Managemen capabili y. He ound he
iden i ied “in use” c i e ia o be consis en wi h hose
p oposed in he s a egy li e a u e.
MacMillan e al. (1985) ound ha i e o he op en
c i e ia had o do wi h he en ep eneu ’s pe sonali y and
expe ience indica ing ha he quali y o he en ep eneu
end o be he deciding ac o in he unding decision.
MacMillan e al. (1987) in es iga ed c i e ia dis inguishing
success ul om unsuccess ul en u es in he en u e
sc eening p ocess by a ing 25 c i e ia. The c i e ia we e
di ided in o ou gene al ca ego ies, En ep eneu
Cha ac e is ics, P oduc Cha ac e is ics, Ma ke
Cha ac e is ics and Financial Cha ac e is ics. I was ound
ha wo majo ac o s a e p edic o s o a en u e’s success,
ha is, he ex en o insula ion be ween he compe i ion and
he en u e in he ini ial s age and he deg ee o which he e
is a demons a ed ma ke accep ance o he p oduc .
Kaka i (2003) in es iga ed 38 c i e ia in six ca ego ies, ha
is, he ou ca ego ies iden i ied by MacMillan e al. (1987)
and wo addi ional ca ego ies, namely, Resou ce Based
Capabili y and Compe i i e S a egy. I was ound ha a
hos o ac o s oge he in luence he success o ailu e o
new en u es. Thus using limi ed c i e ia may o e look
impo an aspec s o a en u e. Kaka i (2003:450) s a es ha
he “ inancial conside a ion i sel is no an impo an
de e minan o a en u e’s success bu i he igh
en ep eneu , he igh s a egy and he igh p oduc a e
chosen, and he igh capabili y is de eloped, e u ns will
ollow.” Kaka i (2003) sugges s a model ha is ex ended o
inco po a e c i e ia ela ed o en ep eneu s, esou ce-based
capabili ies, s a egies, indus y/ma ke s uc u e, i
be ween esou ce a ailabili y and s a egies, i be ween
ma ke s uc u e and s a egies, and an in e ac ion o hose
ac o s.
Whe eas MacMillan e al. (1985) e alua ed he impo ance
o a ious po en ial c i e ia o indi idual VCs, F ied and
His ich (1994) iden i ied gene ic c i e ia ha all VCs use.
F ied and His ich (1994) ound h ee basic cons uc s, ha
is, Concep , Managemen and Re u ns, con aining 15
c i e ia. The Concep cons uc has ou componen s. Fi s ly,
he e mus be a signi ican po en ial o ea nings g ow h.
Secondly, he in es men mus in ol e a p oduc o concep
ha al eady wo ks o can be b ough o he ma ke wi hin
h ee yea s. Thi dly, he e need o be a signi ican
compe i i e ad an age, o he indus y should be ela i ely
non-compe i i e. Las ly, he concep mus ha e easonable
o e all capi al equi emen s.
As a as he Managemen cons uc is conce ned, he e a e
se e al c i e ia ha VCs a e in he en ep eneu and
managemen . Pe sonal in eg i y is a ed i s , ollowed by
p io expe ience and ack eco d. Manage s mus be
ealis ic and able o iden i y isk and deal wi h i whe e
app op ia e. Manage s need o be ha dwo king, lexible and
should ha e a ho ough unde s anding o business.
Flexibili y and leade ship a e impo an c i e ia and
manage s mus ha e gene al managemen expe ience. The
Re u ns cons uc , on he o he hand, has h ee componen s.
Fi s ly, he e need o be an exi oppo uni y. Secondly, he
in es men mus o e he po en ial o a high a e o e u n
and, inally, he en u e mus o e he po en ial o a high
absolu e e u n.
The Tyebjee and B uno (1984) s udy is one o he mos ci ed
a icles in he li e a u e on en u e capi al c i e ia. Tyebjee
and B uno iden i ied 23 c i e ia in 5 ca ego ies. The i s ,
Ma ke a ac i eness, depends on exis ence, size, g ow h
and accessibili y o he ma ke . The second, P oduc
di e en ia ion, is de e mined by he abili y o he
en ep eneu o apply echnical skills in c ea ing a unique
p oduc ha can be p o ec ed by pa en s and enjoy a high
p o i ma gin. The hi d, Manage ial capabili y, esul s om
he skills o he ounding eam in managing se e al business
unc ional a eas. The ou h, En i onmen al h ea
esis ance, ep esen s he ex en o which he en u e is able
o esis and de e h ea s om he ex e nal en i onmen ,
which is in luenced by ac o s like ba ie s o en y and
changes in echnology. The las ca ego y is called he Cash-
ou po en ial, and ep esen s he ex en o which he en u e
capi alis eels ha he in es men can be ha es ed in he
app op ia e ime ame.
36 S.A .J.Bus.Manage.2009,40(1)
Pin ado e al. (2007) did esea ch on he Spanish en u e
capi al ma ke and had he ollowing indings. All
cha ac e is ics abou he owne we e ound o be o high
impo ance and we e a ed in he ollowing o de . Hones y
and In eg i y we e a ed as he mos impo an , ollowed by
Knowledge o he sec o , Wo k expe ience, Managemen
eam, Leade ship skills, and inally, Unde s anding o
company objec i es. The e was a small s anda d de ia ion in
he esponden s’ a ings gi ing an indica ion o high
ag eemen be ween hem.
Th ee o he p oduc cha ac e is ics, ha is, p o en p oduc
success, p oduc s age o li e cycle and ma ke ing s a egy
we e anked as impo an . Simila ly, hey had a small
s anda d de ia ion indica ing ag eemen be ween
esponden s. Ma ke ela ed issues a ed highe han he
equi emen ha he p oduc be high ech, indica ing ha
ma ke issues ela ing o he p oduc a e mo e impo an
han whe he he p oduc is o ien a ed owa d high
echnology. Howe e , ma ke ela ed issues a e gene ally
anked as being less impo an han owne and p oduc
cha ac e is ics.
The Sou h A ican en u e capi al indus y
Al hough he e has been a signi ican expansion in p i a e
equi y ac i i y in Sou h A ica in ecen yea s, he ocus has
no been on en u e capi al bu a he on me ge s and
acquisi ions ac i i ies by la ge playe s. This is e iden in
he spa e o buyou s ha happened in he las wo yea s.
The e is inc eased in e es in Sou h A ican companies by
in e na ional playe s as hese companies display s ong
ea nings g ow h, imp o ed exi alues, and high di idend
a ios, when compa ed o en u e p ojec s elsewhe e in he
wo ld. Acco ding o Bloombe g online, o he 21 Sou h
A ican companies sc eened by Me ill Lynch almos hal o
hem had an in e nal a e o e u n o mo e han 15%,
compa ed o less han a hi d o companies in Eu ope
(Sou hA ica.in o, 2007). Sou h A ican companies also
ha e ne deb - o-equi y a ios o abou 7% compa ed o 32%
in he USA and 45% in Eu ope. This gi es buyou in es o s
he oppo uni y o gea hei in es men s (Sou hA ica.in o,
2007).
Black Economic Empowe men (BEE) emains a majo
sou ce o ac i i y in he indus y and he e a e majo mo es
by indus y playe s no only o ans o m hemsel es bu
also o p omo e BEE in es men s in o companies (SAVCA,
2007). Acco ding o Cohen (2006) o A gil Ven u e Capi al,
he Sou h A ican en u e capi al indus y emains in i s
in ancy. I is unlikely ha new VC unds will be es ablished
o ocus on ea ly s age oppo uni ies un il he e a e a
easonable numbe o meaning ul VC success s o ies.
Howe e , wi hou he VC Funds, i is unlikely ha hese
success s o ies will occu – a somewha ca ch-22 si ua ion.
Long (2007) s a ed ha he Ame ican model o en u e
capi al does no wo k in Sou h A ica. This is because he e
is a bigge demand o capi al wi h g ea e isk and less
e u ns. The e is also an inc easing demand o ea ly s age
in es men s and i hese a e no going o be unded, a
si ua ion may de elop whe e he e migh no be enough la e
s age in es men s a ailable in he u u e. I is clea om he
media epo s and om en ep eneu s and VCs alike, ha
sou cing unds o s a -up i ms in Sou h A ica is
p oblema ic in ha he e a e no enough unds o go a ound.
This will mani es in di icul ies o bo h he en ep eneu ,
in ha he/she s uggles o loca e in es men capi al, and he
VC, in ha he e will be an e e inc easing pile o
applica ions o si h ough and loca e sui able i ms o
in es in.
The objec i e o his s udy is o iden i y he c i e ia ha
mus be ul illed in o de o a new en u e o succeed in
ob aining en u e capi al unding in he Sou h A ican
ma ke . This is done by iden i ying ac o s and
cha ac e is ics in he li e a u e ha en u e capi alis s look a
and asking he sampled en u e capi alis s o a e hem in
o de o impo ance. The esul s o his s udy a e hen
compa ed wi h hose o simila s udies done in he USA and
Eu ope, whe e mos o he s udies ega ding en u e capi al
in es men c i e ia we e done in he pas . This s udy will
help bo h p ospec i e en u e capi alis s in hei decision-
making p ocess and en ep eneu s in he p epa a ion o hei
en u e capi al applica ions.
Da a and me hodology
A su ey was conduc ed based on a sample d awn om a
lis o ull and associa e membe s o he Sou h A ican
Ven u e Capi al Associa ion (SAVCA). E en hough
SAVCA has 55 ull membe s and 27 associa e membe s,
some o he membe s do no all wi hin he adi ional
de ini ion o en u e capi alis s. This is because, al hough
hey supply se ices o he en u e capi al indus y, hey do
no pa icipa e in ac ual en u e capi al ac i i ies. Mos o
he exclusions we e associa e membe s who consis mos ly
o law and ad iso y o consul ing i ms.
Many ull membe s o SAVCA also do no quali y as
adi ional en u e capi alis s. This include membe s who
a e in ol ed in hedge und and p i a e equi y ac i i ies and
as such do no mee he c i e ia o en u e capi alis s.
In es men holding companies we e also excluded as hey
end o do s a egic longe e m in es men s. The emainde
o he companies ha we e excluded consis s o banking and
inancing companies and companies in ol ed in
en ep eneu ship ia communi y upli men . A e an
ex ensi e elimina ion p ocess, only 16 SAVCA membe s
quali ied as en u e capi al i ms and we e used in he
su ey. F om he 16 ques ionnai es sen ou , 12 comple ed
su eys we e e u ned gi ing a esponse a e o 75%.
Pa icipan s had he op ion o ill in and submi an online
ques ionnai e, ill in he wo d documen and send i ia
email, o p in ou he ques ionnai e and ax he comple ed
documen . To ensu e p i acy and secu i y, a secu e websi e
ha could only be accessed wi h a alid use name and
passwo d was es ablished. All pa icipan s in he su ey
we e con ac ed ia email and supplied wi h an elec onic
copy o he ques ionnai e in Mic oso Wo d o ma , a URL
o he online su ey and a alid and indi idual use name and
passwo d. The websi e was c ea ed wi h Visual S udio 2005
in he C# language on a Mic oso In e ne In o ma ion
Se e . Mic oso SQL Se e 2005 was used as he back-
end da abase o collec he da a. The websi e was b owse

S.A .J.Bus.Manage.2009,40(1) 37
independen so as o acili a e he answe ing o he su ey in
he b owse o choice o he esponden .
Ques ionnai e
The ques ionnai e was used as he sole me hod o da a
collec ion. To s a o , esponden s we e asked o ank ou
ca ego ies o c i e ia in o de o impo ance om 1 o 4. The
ou iden i ied ca ego ies we e “Managemen c i e ia”,
“P oduc c i e ia”, “Financial c i e ia” and “Ma ke c i e ia”.
The es o he su ey con ained Like scale ques ions in he
abo e-men ioned ca ego ies and an addi ional ca ego y
called “O he c i e ia”. This ca ego y con ained c i e ia ha
we e no lis ed unde any o he ou a o emen ioned
ca ego ies.
The Like scale ques ions we e o mula ed om c i e ia
iden i ied in he li e a u e and used by o e seas VCs in hei
e alua ion p ocesses. Responden s had o a e he c i e ia in
o de o impo ance wi h 1 being “no impo an a all”
h ough o 5 being “ e y impo an ”. This se ed o p o ide
in o ma ion on he ela i e impo ance o he ac o s. A
Like scale ques ionnai e p o ides a consis en means o
ob aining da a. I helps educe bias ha may be in oduced
by making use o in e iews wi h open-ended ques ions and
i pe mi s a mo e de ailed s a is ical analysis o esponses
han is possible wi h semi-s uc u ed o open-ended
ques ions.
Limi a ions
The s udy was limi ed o Sou h A ican en u e capi alis s
ha suppo small and medium scale en e p ises in hei
ea ly s age o de elopmen wi h a minimum in es men
amoun o less han R 15 million. Because he ga he ing o
da a is e ospec i e, VCs may o e s a e success ul and
unde s a e unsuccess ul aspec s o he en u e and he e
migh be biases and e o s associa ed wi h sel - epo ing.
The o de e ec was limi ed by andomising he ques ions
wi hin he de ined ca ego ies and no p esen ing hem in any
pe cei ed o de o impo ance. Due o he s ic de ini ion o
en u e capi alis s used in his s udy, he popula ion o
possible esponden s was a he small. I was ea ed ha
elaxing he de ini ion o inc ease he popula ion size migh
ha e in oduced bias and skew he esul s.
Analysis o in es men decision c i e ia
The ankings o he ou ca ego ies o c i e ia, ha is,
“Managemen conside a ions”, “P oduc conside a ions”,
“Financial conside a ions” and “Ma ke conside a ions”,
we e analysed using a nonpa ame ic es , he F iedman wo-
way analysis o a iance (ANOVA) by anks. The objec i e
was o de e mine i he e a e signi ican di e ences, a he
10% le el o signi icance, in he pe cei ed impo ance o
he ou ca ego ies. The obse ed F iedman s a is ic o 7,3
was la ge han he chi-squa ed c i ical s a is ic o 6,2514
sugges ing ha he e a e signi ican di e ences in he
ankings o he ou ca ego ies. This is con i med by he p-
alue o 0,0629. I can, he e o e, be concluded ha
di e ences exis in he pe cei ed impo ance o a leas 2
ca ego ies when he es is conduc ed a he 10% le el o
signi icance. The F iedman es esul s a e p esen ed in
Table 1.
Table 1: The F iedman es esul s
F iedman Tes
G oup Rank Sum Mean S d. De .
Managemen Conside a ions 40 3,3333 0,8876
P oduc Conside a ions 27 2,2500 1,0553
Financial Conside a ions 29 2,4167 1,1645
Ma ke Conside a ion 24 2,0000 1,0445
F S a 7,3
d 3
p- alue 0,0629
chi-squa ed C i ical 6,2514
Coe icien o conco dance 0,2028
By looking a he means o he di e en ca ego ies in Table
1, i can be seen ha he mean o managemen
conside a ions is 3,3333 and ha his is ema kably highe
han he mean o ma ke c i e ia a 2,0000.1 The e o e, he
esul s sugges ha managemen conside a ions a e
conside ed o be he mos impo an c i e ia g oup and
ma ke conside a ions o be he leas impo an .
Managemen conside a ions we e anked as mos impo an
by 58% o he VCs pa icipa ing in his s udy, whils 17% o
he pa icipan s anked hem as second mos impo an . I
can, he e o e, be concluded ha 75% o he pa icipa ing
VCs conside managemen conside a ions o be ei he he
i s o second mos impo an c i e ia g oup in hei
in es men decisions.
To in es iga e i managemen conside a ions a e
signi ican ly mo e impo an han ma ke conside a ions, he
Sign es was used. The null hypo hesis ha no di e ence
exis s be ween he wo ca ego ies was es ed agains he
al e na i e hypo hesis ha managemen conside a ions a e
mo e impo an han ma ke conside a ions. The es was
done a he 10% le el o signi icance.
The z s a is ic o 2,3094 is la ge han he z c i ical alue
(one- ail) o 1,2816 sugges ing ha he null hypo hesis can
be ejec ed a he 10% le el o signi icance. The p- alue o
0,0105 is also e y small sugges ing ha he e is s ong
e idence in a ou o he al e na i e hypo hesis. I can,
he e o e, be concluded ha Sou h A ican en u e
capi alis s pe cei e managemen conside a ions o be mo e
impo an han ma ke conside a ions. This is consis en
wi h he indings o MacMillan e al. (1985) who ound ha
1The da a used in his analysis was manipula ed by e e sing he
o iginal ankings in o de o associa e a highe mean wi h he
mo e impo an c i e ia and a lowe mean wi h he leas impo an
c i e ia.
38 S.A .J.Bus.Manage.2009,40(1)
he quali y o he en ep eneu ends o be he deciding
ac o in he unding decision. Wells (1974), Poindex e
(1976) and Tyebjee and B uno (1984) ound managemen
commi men , quali y, and skills and his o y, espec i ely, o
be he mos impo an c i e ia.
Table 2: Sign es esul s
Sign Tes
Di e ence Managemen conside a ions –
Ma ke conside a ions
Posi i e Di e ences 10
Nega i e Di e ences 2
Ze o Di e ences 0
z S a 2,3094
P(Z<=z) one- ail 0,0105
z C i ical one- ail 1,2816
P(Z<=z) wo- ail 0,0210
z C i ical wo- ail 1,6449
The mos impo an c i e ia
Da a ob ained om he es o he ques ionnai e h ough he
Like scale ques ions, we e summa ised using means and
s anda d de ia ions. Thi y nine pe cen o he c i e ia ga e
a mean a ing highe han 4 and hey consis o 10
managemen c i e ia, 2 p oduc c i e ia, 5 inancial c i e ia
and 4 ma ke c i e ia. These we e hus conside ed o be he
mos impo an c i e ia and a e p esen ed in Table 3.
The indings suppo hose o Wells (1974), Poindex e
(1976), Tyebjee and B uno (1984) and MacMillan e al.
(1985; 1987) who ound managemen c i e ia o be he mos
impo an . MacMillan e al. (1985) s a ed ha i e o he op
en c i e ia had o do wi h he en ep eneu ’s pe sonali y and
expe ience indica ing ha he quali y o he en ep eneu
end o be he deciding ac o in he unding decision.
Mish a (2004) ound ha Indian VCs, like hei Sou h
A ican coun e pa s, a ed he en ep eneu s’ pe sonali y
ai s and expe ience much highe han he inancial c i e ia,
which in u n we e ega ded as mo e impo an han bo h he
p oduc and ma ke c i e ia.
The i s h ee c i e ia, ha is, he en ep eneu ‘s hones y
and in eg i y, a good ma ke accep ance o he p oduc o
se ice, and a high in e nal a e o e u n (IRR), we e ied
wi h a mean a ing o 4,9 and a s anda d de ia ion o 0,3.
The ma ke need o he p oduc o se ice was a ed
sligh ly lowe wi h a mean a ing o 4,8 and a s anda d
de ia ion o 0,4. This c i e ion is closely ela ed o good
ma ke accep ance o he p oduc o se ice. The e o e, i is
clea ha ma ke need and accep ance o p oduc o se ice
a e undoub edly impo an c i e ia. The ou c i e ia we e
om each o he ou ca ego ies. This seems o suppo he
iew by Kaka i (2003) ha i you ge he igh en ep eneu ,
he igh s a egy, he igh p oduc and capabili y, he e u n
will ollow.
The a ing o he en ep eneu ’s hones y and in eg i y as
mos impo an by Sou h A ican VCs is in ag eemen wi h
wha Pin ado e al. (2007) ound in his esea ch on he
Spanish en u e capi al ma ke . He ound all cha ac e is ics
abou he owne o be o high impo ance, wi h hones y and
in eg i y being he mos impo an , ollowed by sec o
knowledge, wo k expe ience, managemen eam, leade ship
skills and, inally, unde s anding o company objec i es. As
is he case in his s udy, a small s anda d de ia ion was
ound in Pin ado e al. (2007) indica ing a high le el o
ag eemen be ween he esponden s.
The esul s a e also suppo ed by he indings om F ied
and His ich (1994). Besides he iabili y and no el y o he
p ojec , and he possibili y o high e u ns on in es men , he
in eg i y, ack eco d and leade ship skills o he
en ep eneu we e also ound o be e y impo an .
Acco ding o MacMillan e al. (1985), he c i e ion ha
ca ies he mos weigh in VCs’ decision-making p ocess is
ela ed o he en ep eneu , his pe sonali y, in eg i y and
expe ience. Mish a (2004) ound ha in abou 97% o he
cases in bo h he USA and India, he en ep eneu s’ o me
business associa es a e con ac ed o due diligence o
in es iga e he en ep eneu ’s in eg i y, a en ion o de ail
and u ge o g ow.
Also ied in i s place is a good ma ke accep ance o he
p oduc o se ice. The impo ance o his c i e ion is
con i med by MacMillan e al. (1987) who ound ma ke
accep ance o he p oduc and insula ion agains compe i i e
a acks o be he mos impo an c i e ia and an indica ion
o success. Mish a (2004) ound ha , as a ule, VCs will
no in es in a business wi hou a clea indica ion o ma ke
accep ance o he p oduc no ma e how echnically
ad anced he p oduc may be.
The hi d c i e ion also ied in i s place is he IRR. The
IRR is de ined by W igh and Robbie (1998) as a p ocess
ha is likely o be made up o a se ies o i e a ions using
di e ing possible u u e ends in he pe o mance o he
en u e and ha his is he mos common pe o mance
measu e in he indus y. The a ing o his c i e ion as join ly
mos impo an by Sou h A ican VCs concu s wi h W igh
and Robbie (1998) bu seems o be in disag eemen wi h
Dixon (1991) who s a es ha he e is li le sc u iny o
in o ma ion o adjus a ge IRRs.
S.A .J.Bus.Manage.2009,40(1) 39
Table 3: C i e ia a ed as impo an by pa icipa ing VCs
C i e ion Mean S d. De . Ca ego y
The en ep eneu is hones and has in eg i y 4,9091 0,3015 Managemen
A good ma ke accep ance o he p oduc o se ice is expec ed 4,9091 0,3015 P oduc
The en u e will p o ide a high in e nal a e o e u n (IRR) 4,9091 0,3015 Financial
The e is a ma ke need o he p oduc o se ice 4,8182 0,4045 Ma ke
The en ep eneu has a g ea desi e o success 4,7273 0,4671 Managemen
The p oduc /se ice has a compe i i e ad an age o e compe ing p oduc s 4,7273 0,4671 P oduc
The en u e has high alua ion p ojec ions 4,7273 0,4671 Financial
The e is po en ial o ma ke g ow h 4,7273 0,4671 Ma ke
The en u e has signi ican po en ial o ea nings g ow h 4,6364 0,5045 Financial
The en ep eneu has excellen managemen skills/expe ience 4,5455 0,5222 Managemen
The en ep eneu is ha dwo king and lexible 4,5455 0,5222 Managemen
The en ep eneu has good leade ship abili y 4,4545 0,5222 Managemen
The ma ke is big 4,4545 0,6876 Ma ke
The en ep eneu has good isk managemen quali ies 4,3636 0,6742 Managemen
The en u e has high p o i ma gin p ojec ions 4,2727 0,7862 Financial
The en ep eneu has a good ack eco d 4,2727 0,6467 Managemen
The en ep eneu has good knowledge o he sec o 4,1818 1,4709 Managemen
The en ep eneu is capable o in ense, sus ained e o 4,1818 0,6030 Managemen
The en u e will p o ide a high absolu e e u n 4,1818 0,6030 Financial
The p oduc /se ice has open access o he ma ke 4,1818 0,7508 Ma ke
The e e ences o he en ep eneu a e epu able 4,0909 0,9439 Managemen
The leas impo an c i e ia
Table 4 lis he c i e ia ha we e a ed as no impo an by
he VCs and consis o all c i e ia ha had a mean a ing o
less han 3. The e we e en c i e ia o e all, consis ing o 5
inancial c i e ia, 2 p oduc c i e ia, 2 ma ke c i e ia and 1
unca ego ised c i e ion. None o he managemen c i e ia
we e conside ed o be unimpo an , con i ming he esul s
epo ed so a in his s udy. This is, howe e , con a y o
some ea lie o e seas s udies ha discoun ed he ole o he
en ep eneu in a ou o o he a iables such as esou ce-
based capabili ies, s a egy and indus y s uc u es as
de e minan s o he success o a new en u e (Sandbe g &
Ho e , 1987).
The leas impo an o he c i e ia is he ax bene i wi h he
lowes mean a ing o only 1,9. The le el o ag eemen
among esponden s was high, as e idenced by a low
s anda d de ia ion o 0,7. This is consis en wi h Tyebjee
and B uno’s (1984) indings ha ax bene i s we e no
alued in 34% o he cases al hough he pe cen age is much
highe in he cu en s udy a 53,3%. The explana ion by
Tyebjee and B uno ha mos VCs see hei mission as
eaping capi al gains, a he han p o iding a ax shel e o
hei in es o s, seems plausible.
P ies (2001) s a es ha ollow up inancing is by a he
mos common e en . Sou h A ican VCs conside he
c i e ion ha no ollow up in es men is equi ed o be he
second leas impo an and is ied in his place wi h he
c i e ion ha he en u e will equi e low moni o ing and
adminis a ion cos s. This could imply ha he VCs do no
mind incu ing high moni o ing and adminis a ion cos s
since moni o ing is an inhe en pa o hei ac i i ies.
Acco ding o W igh and Robbie (1998), moni o ing is a
cos ly exe cise ha canno be pe o med con inuously bu
ha i is e y impo an ha he VC pe iodically check he
s a us and p ese e he op ion o e mina e he in es men a
each s age.
40 S.A .J.Bus.Manage.2009,40(1)
Table 4: C i e ia a ed as no impo an by pa icipa ing VCs
C i e ion Mean S d. De . Ca ego y
The e will be a ax bene i in inancing he en u e 1,9091 0,7006 Financial
The e will be no ollow up in es men equi ed 2,0909 1,3004 Financial
The en u e will equi e low moni o ing and adminis a ion cos s 2,0909 1,3004 Financial
The en u e has BEE s a us 2,3636 1,2863 O he
The en u e will ope a e in a non-compe i i e indus y 2,4545 1,0357 Ma ke
The en u e will equi e low ma ke ing and p oduc ion cos s 2,6364 1,1201 Financial
The en u e will c ea e a new ma ke 2,6364 0,9244 Ma ke
P oduc /se ice is in an ea ly s age o li e cycle 2,7273 1,7373 P oduc
The en u e has low o e all capi al equi emen s 2,7273 1,1037 Financial
The en u e has p oduc ion capabili ies in place 2,8182 1,3280 P oduc
The BEE s a us o he en u e as a c i e ion is uniquely
Sou h A ican and could no be compa ed wi h any o e seas
s udies. SAVCA (2007) ound BEE o be an eme ging and
impo an d i ing o ce in he ecen g ow h o he p i a e
equi y indus y. The low a ing o his c i e ion seems o
sugges ha he impo ance o BEE is isola ed o he bigge
p i a e equi y deals and has no in luence in he Sou h
A ican VCs’ decision-making p ocesses.
Conclusion and ecommenda ions
This s udy explo es and iden i ies he in es men c i e ia
used by Sou h A ican en u e capi alis s in hei en u e
sc eening and e alua ion p ocesses and compa es hese
c i e ia wi h he esul s ob ained in simila s udies ab oad.
By iden i ying he c i e ia ha a e deemed as impo an ,
en u e capi alis s can enhance hei decision-making
p ocesses and en ep eneu s can adjus hei p epa a ions o
en u e capi al applica ions o maximise hei success a es.
By ale ing en ep eneu s o hese c i e ia, some po en ially
lawed p oposals can be co ec ed be o ehand, hence
enhancing he en u e capi al p ocess o bo h he en u e
capi alis and he en ep eneu .
The da a we e collec ed by sending a ques ionnai e o 16
iden i ied Sou h A ican en u e capi alis s, o which 12
esponded. C i e ia used by en u e capi alis s in Eu ope and
he USA we e iden i ied om he li e a u e and used o
cons uc he ques ions o he ques ionnai e. Sou h A ican
VCs we e asked o a e he impo ance o hese c i e ia on a
scale o 1 o 5, wi h 5 being “ e y impo an ”. The da a we e
summa ised by compu ing means and s anda d de ia ions o
he esponses. I was ound ha he h ee mos impo an
c i e ia o Sou h A ican VCs a e he en ep eneu ’s
hones y and in eg i y, a good expec ed ma ke accep ance
and a high IRR. Using he F iedman and Sign es s, i was
ound ha Sou h A ican en u e capi alis s, jus like hei
o e seas coun e pa s, alue managemen ela ed ac o s in
e alua ing new p ojec s o in es men , han hey do ma ke
ela ed ac o s. The esul s a e deemed use ul o VCs in hei
assessmen s o en u e p ojec s and possibly o
en ep eneu s in hei ques o capi al.
Because o he limi ed pool o en u e capi alis s in Sou h
A ica, u u e s udies o his na u e should conside a c oss
coun y o egional analysis. This would inc ease he
popula ion om which o sample, he eby imp o ing he
eliabili y o he s a is ical esul s. A u he possibili y o
inc ease he sample size would be he inclusion o p i a e
equi y i ms, which may allow o compa ison by ype o
in es men , size o in es men , as well as s age o
in es men . Since da a o his s udy we e collec ed a a
single poin in ime, possible changes in e alua ion c i e ia
o e ime we e no cap u ed. A s udy o he c i e ia using
da a collec ed o e ime may e eal in e es ing esul s. Such
a s udy migh po ay he deg ee o dynamism o he en u e
capi al in Sou h A ica. I will also be in e es ing o
in es iga e i e alua ion s a egies used by VCs can be used
o de e mine he pos in es men pe o mance o en u es.
Re e ences
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abili y, en u e in es men s, and isk sha ing’, Managemen
Science, 38(10): 1232-1245.
Ba y, C. 1994. ‘New di ec ions in esea ch on en u e
capi al inance’, Financial Managemen , 23(3): 3-15.
Chan, Y-K., Siegel, D. & Thacke , A.V. 1990. ‘Lea ning,
co po a e con ol and pe o mance equi emen s in en u e
capi al con ac s’, In e na ional Economic Re iew, 31(2):
365-382.
Cohen, S. 2006. ‘Exi s se o inc ease wo ldwide as en u e
capi al indus y con inues o globalise, says E ns & Young’,
E ns & Young 2006 P ess Releases, 31 May 2006. [online]
URL:
h p://www.ey.com/global/con en .ns /Sou h A ica/31 Ma
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Sep embe 2007.
Dixon, R. 1991. ‘Ven u e capi alis s and he app aisal o
in es men s’, OMEGA - The In e na ional Jou nal o
Managemen Science, 19(5): 333-344.