Factors influencing venture capitalists' project financing decisions in South Africa

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, h ps://doi.o g/10.4102/sajbm. 40i1.533 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/218412 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ S.A .J.Bus.Manage.2009,40(1) 33 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 Ami , R., Glos en, L. & Mulle , E. 1990. ‘En ep eneu ial 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 y 06 Exi s se o inc ease wo ldwide. Accessed 27 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.