Does startup experience matter? Venture capital selection criteria among Israeli entrepreneurs

Abstract

In this study we are concerned with understanding Israeli entrepreneurs’ selection criteria in choosing a venture capital (VC) firm. Our primary aim was to investigate how startup experience impacts entrepreneurs’ trade-offs between resource-related criteria and criteria related to the conditions of the deal. Hypotheses are drawn from agency theory, the resource dependence perspective and extant VC research. Data is gleaned from interviews with 144 Israeli entrepreneurs that are either in the process of acquiring VC or have recent experience of raising it. Hypotheses are tested with ordinal logit models. Results demonstrate that there is a negative relationship between startup experience and the importance entrepreneurs attach to valuation, and that the importance attached to a VC firm’s network and reputation moderates this relationship. In addition, the importance attached to a VC firm’s network moderates the relationship between startup experience and the importance assigned to contractual terms. Furthermore, results indicate that while inexperienced entrepreneurs attach more importance to valuation than experienced ones, they tend to emphasize it less when they seek to gain access to a VC firm’s network of contacts. Entrepreneurs are shown to be more concerned about valuation when they approach less reputable VC firms, particularly if the entrepreneur has substantial startup experience.

Keywords:

• Israel
• venture capital
• entrepreneurship
• experience
• selection
• valuation

Acknowledgment

The authors would like to thank assistant professor Khondeker Aktaruzzaman from Al Akhawayn University in Ifrane for his valuable comments on the manuscript.

Notes

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4. Retrieved from http://nocamels.com/2015/02/bloomberg-innovation-index-israel/, 10 December 2015.

5. Retrieved from http://nocamels.com/2014/12/israel-tech-startup-nation-2014/, 10 December 2015.