A Pilot study of venture capital investment appraisal in Australia

Alex Proimos, Sue Wright

Research output: Contribution to journalArticle

Abstract

Illiquidity, volatile returns and lack of information are sources of the high risk that characterise the investments made by venture capitalists (VCs). Despite the importance of such investments in the contemporary business and technological environment, and the associated risk-related difficulties, little Australian research has been conducted into the decision-making processes of VCs. This study investigates both the investment process and some of the strategies used by VCs for reducing selected risks. The specific source of risk examined is information asymmetry, which is caused by lack of information on the part of the VCs, and which can lead to the added risks of adverse selection and moral hazard. Four Australian VC firms were surveyed using a comprehensive open-ended questionnaire. A manual content analysis was employed to analyse the questionnaire responses. Consistent with prior research, the Australian VCs sampled are found to employ Berger and Udell's three steps of investment: selection, contracting and monitoring. Furthermore, the semi-formal selection step of the investment process is found to consist of three distinct stages: deal sourcing, screening and evaluation. A number of techniques are used to minimise the risks of information asymmetry during the screening and evaluation stages, as well as during the later steps of contracting and monitoring.
Original languageEnglish
Pages (from-to)272-286
Number of pages15
JournalJournal of Financial Services Marketing
Volume9
Issue number3
DOIs
Publication statusPublished - 2005

Keywords

  • venture capital
  • investment appraisal
  • information asymmetry
  • selection criteria
  • decision making

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