Opening the black box of venture capitalists’ evaluation of entrepreneurial teams

ABSTRACT

Entrepreneurial teams represent a critical evaluation criterion for venture capitalists (VCs) in the context of making investment decisions. Despite the importance of teams in VCs’ new venture evaluation, we lack an understanding of the ways in which VCs evaluate entrepreneurial teams. Using multiple case studies of 15 VCs, we identify five distinct approaches to evaluation: intuitive approach, extended intuitive approach, systematic intuitive approach, psychological rational approach, and scientific rational approach. These approaches vary in terms of the extent to which the VCs performing the evaluation develop structured procedures, incorporate objective data analysis, and spend time on data collection and analysis. Our findings reveal VCs’ heterogeneous approaches to evaluation, which feature different combinations of subjective and objective evaluations.

KEYWORDS:

• Venture capital
• new venture
• entrepreneurial team
• subjective evaluation

Introduction

Entrepreneurship represents an important driver of innovation in an economy, as entrepreneurs introduce disruptive products and services to the market (Wiklund et al., 2019). To scale-up their innovative products and services, entrepreneurs tend to require capital from investors, such as banks, business angels, and venture capitalists (VCs) (Kerr & Nanda, 2015). Entrepreneurs who receive venture capital tend to be more successful than those who are not backed by VCs (compare, Sandberg & Hofer, 1987; Spinelli & Adams, 2012). For instance, Kaplan and Lerner (2010) found that VC-backed entrepreneurs are more likely to scale-up their projects and achieve an initial public offering than those without venture capital funding. The reason is that VCs can provide specialized knowledge and social capital (Colombo & Grilli, 2010) that can help entrepreneurs overcome the technological and market challenges they face when advancing their businesses (Li & Zhou, 2022).

To understand investment decisions of VCs, previous studies have focused on identifying and differentiating the importance of various evaluation criteria that VCs consider before investing in a new venture, including financial aspects, the situations of the market and competitors, characteristics of products and services, and, importantly, entrepreneurs and their teams (Baum & Silverman, 2004; Bellavitis et al., 2019; Gompers et al., 2020; Hall & Hofer, 1993; MacMillan et al., 1985, 1987; Nigam et al., 2020; Nunes et al., 2014; Roure & Maidique, 1986; Zacharakis & Meyer, 1998; Zutshi et al., 1999). Specifically, when for-profit VCs screen and evaluate first-time targets – that is, new ventures in which they have not invested before (either alone or in collaboration with other investors) – before making an independent investment that is likely to generate exponential financial returns, they tend to focus significantly on the entrepreneurial team in question, such as team members’ work and industry/market experience, leadership abilities, articulate presentation of the business, and reaction to uncertainty (Colombo & Grilli, 2010; Hall & Hofer, 1993; MacMillan et al., 1985, 1987; Nigam et al., 2020; Nunes et al., 2014; Pintado et al., 2007). These characteristics determine whether VCs evaluate the new venture positively and thus decide to invest in it (compare, Croce et al., 2017). Despite the mounting evidence to support the importance of entrepreneurial teams in VCs’ evaluation of new ventures, the literature has tended to ignore “how” VCs evaluate entrepreneurial teams. That is, how VCs interact with the team, incorporate their subjective opinions and objective information about the team into the evaluation process, and translate their evaluation into their final decision remains a puzzle (Cumming et al., 2022; Drover et al., 2017). This oversight is regrettable because it prevents us from theorizing about the ways in which team evaluation criteria are evaluated and implemented in VCs’ decision-making processes and determine the final investment decision (compare, Van de Ven & Poole, 1990). Our study fills this research gap by unpacking this decision-making process to better theorize regarding the ways in which VCs evaluate and interact with entrepreneurs and their teams to make their final investment decisions. Therefore, our research question is as follows: how do VCs evaluate entrepreneurial teams when making investment decisions?

To answer this research question, we conducted multiple case studies of 15 venture capitalists in the USA and Europe. Specifically, we focused on for-profit VCs and their evaluation for first-time independent investments when screening potential new ventures – that is, assessing targets in which they have not invested before. In particular, we theorized about how VCs evaluate entrepreneurial teams for which they have no ex ante knowledge and need to gather and process related information themselves before making the investment decision. After analyzing the interview data, observations, and field notes, we identified five distinct evaluation approaches that VCs consistently follow when evaluating a new venture for the first time, based on three dimensions – structure (for example, the systematic adoption of specific tools), objectiveness (for example, reliance on personal judgment), and time-intensity (in terms of the time required to complete the whole evaluation process). Specifically, we categorized these five approaches into two groups: (1) intuitive approaches, in which VCs base their decisions on their subjective judgment either without any structured procedures and time commitments (in the case of the intuitive approach) or by using some ad hoc procedures, such as interviewing stakeholders over the course of a few months (in the case of the extended intuitive approach) or even a longer period lasting up to one year (in the case of the systematic intuitive approach), and (2) rational approaches, in which VCs follow structured evaluation procedures and produce evaluation scores for the entrepreneurial team under evaluation. VCs may use these scores merely as a way of comparing the team in question to other teams (in the case of the psychological rational approach) or genuinely care for each team’s particular score (in the case of the scientific rational approach).

Our findings provide several contributions to the VC literature. First, we identify the emergence of objective and systematic approaches that complement the subjective approaches commonly found in the literature (see the review of Drover et al., 2017). In this way, we add evidence and thus contribute to the recent discussion of scientific entrepreneurship (Camuffo et al., 2020; Zellweger & Zenger, 2021) by highlighting the ways in which VCs have increasingly relied on scientific methods, such as by performing quantitative analysis, to attenuate their potential personal bias while improving the transparency and comparability of their evaluation across a variety of new ventures. Second, we contribute to a better understanding of the variations in (Drover et al., 2017) and dynamic nature of VCs’ decision-making processes (Petty & Gruber, 2011). In particular, we differentiate the patterns of interaction exhibited by various types of VCs when making investment decisions – some focusing on gut feelings and informal interactions with the entrepreneurial team and others relying more on the data analyses and feedback loop with a database. In addition, we provide insights into the recent attention paid to the interactions between intuition-based and data-based analyses (Huang & Pearce, 2015) by showing how such interactions differ by the VCs’ evaluation approaches. Finally, we provide a more refined understanding of VCs’ evaluation practices. Although previous studies have highlighted the importance of informal settings, such as personal relationships, in shaping VCs’ investment decisions (Drover et al., 2017; Guenther et al., 2022), we explicate how VCs obtain information about the entrepreneurial team outside the workplace, such as in private dinners. This insight sheds light on the practices that VCs may adopt to more accurately evaluate entrepreneurs’ social and psychological characteristics, which are important factors in their decision-making (Baron et al., 2016; Cumming et al., 2022; Wright et al., 1997).

Theoretical background

Venture capitalists and their investment decisions: The importance of entrepreneurial teams

The term venture capitalists (VCs) refers to institutional investors who provide private capital and equity investments to new ventures (or start-ups) (Gompers & Lerner, 2001; Kaplan & Strömberg, 2001; Spinelli & Adams, 2012). By making such an investment, for-profit VCs expect exponential returns when entrepreneurs successfully scale up new ventures in a few years (Gompers et al., 2020). To facilitate the scale-up of the new ventures in which they invest, VCs not only provide financial capital, but also act as coaches and business partners (Colombo & Grilli, 2010; Gompers et al., 2020; Spinelli & Adams, 2012). By providing this support, VCs expect to have a return ranging between 25% and 35% of their investment if the invested ventures successfully scale-up and grow over the next five years (Zider, 1998).

Despite the potential for such high returns, these investments tend to be associated with high levels of uncertainty because venture capitalists do not necessarily have complete information regarding new ventures (Gompers & Lerner, 2001) that they are encountering for the first-time and lack ex ante information, such as unproven technologies and business models adopted by the new venture (Nanda & Rhodes-Kropf, 2013). To minimize such uncertainties, VCs may take different steps when making investment decisions (Sahlman, 1990), including (1) deal sourcing and screening, (2) conducting evaluation and due diligence (of the potential investments), and (3) post-investment activities (compare, Hall & Hofer, 1993; Gompers et al., 2020; Kaplan & Strömberg, 2001). More specifically, deal sourcing and screening are intended to identify potential investment opportunities, as VCs analyze the growth potential of each proposal (Hall & Hofer, 1993). Once VCs identify potential targets, they conduct due diligence by performing a more thorough evaluation of the proposal and start negotiating the conditions of the investment contract (Gompers et al., 2020). This evaluation considers market size, strategy, technology, customers, competition, the entrepreneurial team, and the risks associated with the proposed venture (Kaplan & Strömberg, 2001). After VCs make an investment, they constantly monitor and support the development of the business during the post-investment stage by giving advice to the entrepreneurial team regarding issues such as ways of making strategic decisions in acquisitions, partnerships, and the recruitment of executive managers (Gompers et al., 2020).

Among these steps, scholars have particularly focused on the importance of the evaluation criteria used with respect to the sourcing/screening and due diligence processes because these criteria determine how likely the new venture is to scale-up and provide VCs with the expected return (compare, Kaplan & Strömberg, 2001). Specifically, several studies have identified the most common criteria used for such evaluation, including (1) financial aspects (for example, potential revenues (Robinson, 2022) and the future return and liquidation possibilities of an investment, such as through an initial public offering (Cumming & Zambelli, 2017)), indicating the likelihood that VCs will profit from the investment and whether they have the possibility of exiting if the new venture fails (MacMillan et al., 1985; Nunes et al., 2014); (2) market and competition (for example, market size, growth rate, and the state of competition (Roure & Maidique, 1986)), signaling whether the new venture faces favorable conditions that allow it to compete against competitors (MacMillan et al., 1987) and to scale-up in the context of the existing economic environment (Hall & Hofer, 1993); (3) products or services (for example, technology and patents) (Baum & Silverman, 2004), denoting whether the new venture offers superior products/services (Zacharakis & Meyer, 1998) and has the necessary proprietary protection (MacMillan et al., 1985) to retain and grow its sales (MacMillan et al., 1987); (4) business model (for example, revenue streams, feasibility, profitability), suggesting whether the new venture can sustain itself over time (Gompers et al., 2020; Robinson, 2022); and (5) characteristics of the entrepreneurial team (Kirsch et al., 2009; Pintado et al., 2007), highlighting the individuals who will be the drivers of the growth of the new venture (Soleimani & Stauffer, 2022). These evaluations can help VCs estimate the future performance of a new venture (Cumming & Zambelli, 2017).

Among those criteria, prior studies have often highlighted the entrepreneurial team as the most critical criterion (Bernstein et al., 2017; Franke et al., 2008; Gompers et al., 2020; Kaplan & Strömberg, 2001; MacMillan et al., 1985, 1987; Nunes et al., 2014; Roure & Maidique, 1986; Zutshi et al., 1999). Namely, the experience, integrity, and attitude of entrepreneurs and their teams indicate whether they are capable of and committed to growing their business and achieving their vision (Hall & Hofer, 1993; Kaplan & Strömberg, 2001). Specifically, VCs tend to focus on five characteristics when evaluating entrepreneurial teams: (1) market/industry experience, (2) relevant work experience, (3) leadership abilities, (4) articulate presentation of the venture, and (5) evaluation of and reaction to risk (Colombo & Grilli, 2010; Dubini, 1989; Franke et al., 2008; Gompers et al., 2020; Hall & Hofer, 1993; MacMillan et al., 1985, 1987; Nigam et al., 2020; Nunes et al., 2014; Pintado et al., 2007; Zacharakis & Meyer, 1998; Zutshi et al., 1999, see Table 1 for an overview of previous works on this topic).¹

Table 1. Previous literature examining VCs’ evaluation of entrepreneurial teams.

Study	Method	Context	Characteristics of entrepreneurial teams
Colombo and Grilli (2010)	Dataset of 439 new technology-based firms and the corresponding team characteristics	Initial evaluation of new ventures	Management experience; educational background
Dubini (1989)	Survey of 67 VCs regarding the criteria for successful and unsuccessful ventures	Ex post comparison between successful and unsuccessful ventures	Capability to exert sustained, intense effort; evaluation of and reaction to risk; ability
Franke et al. (2008)	Conjoint experiment on 51 VCs’ evaluation of team characteristics	Initial evaluation of new ventures	Industry experience; educational background; leadership experience
Gompers et al. (2020)	Survey of 885 VCs regarding investment decisions	Initial evaluation of new ventures and post-investment monitoring	Ability; industry experience; passion; entrepreneurial experience; teamwork
Hall and Hofer (1993)	16 verbal protocols intended to assess investment proposals	Initial evaluation of new ventures	Industry/work experience; balanced skills on the part of the management team; personal compatibility with the investor; experience as entrepreneur
MacMillan et al. (1985)	Survey of 102 VCs regarding investment criteria	Initial evaluation of new ventures	Capability to exert sustained, intense effort; market/industry experience; leadership abilities; evaluation of and reaction to risk; relevant work experience; articulate presentation of venture
MacMillan et al. (1987)	Survey of 67 VCs regarding the criteria for successful and unsuccessful ventures	Ex post comparison between successful and unsuccessful ventures	Evaluation of and reaction to risk; personal compatibility with investor; market/industry experience; leadership abilities; team’s reputation
Nigam et al. (2020)	Analysis of 102 startups (failed and successful) and their attributes	Ex post comparison between successful and unsuccessful ventures	Total years of work experience; type of work experience (technical, entrepreneurial, consultant); network and strong online presence; status as a team as opposed to a sole entrepreneur
Nunes et al. (2014)	Survey of 20 VCs regarding investment criteria	Initial evaluation of new venture	Honesty and integrity; long-term vision; evaluation of and reaction to risk; capability to exert sustained, intense effort; market/industry experience; leadership and management abilities
Pintado et al. (2007)	Survey of 51 VCs regarding investment criteria	Initial evaluation of new venture	Honesty and integrity; market/industry experience; work experience; leadership skills; understanding of company objectives
Roure and Maidique (1986)	Analysis of 8 VCs regarding the criteria for successful and unsuccessful ventures	Ex post comparison between successful and unsuccessful ventures	Work experience; market/industry experience; team completeness
Zacharakis and Meyer (1998)	Policy capturing exercise including 51 VCs to determine ventures’ quality	Initial evaluation of new venture	Management skills and experience; status as a team as opposed to a sole entrepreneur; management stake in the company; motivation; personality
Zutshi et al. (1999)	Survey of 31 VCs regarding investment criteria	Initial evaluation of new venture	Capability to exert sustained, intense effort; evaluation of and reaction to risk; articulate presentation of venture; market/industry experience; leadership abilities; relevant work experience

These characteristics serve as a form of quality control and offer assurance that allows VCs to speculate on the quality of the team (which they are encountering for the first time) before making an initial investment (Bellavitis et al., 2019) – similar to the process of hiring new employees (Nigam et al., 2020; Spence, 1973). These team characteristics signal to VCs how likely a new venture, under the leadership of the associated team, is to succeed in expanding and thus becoming a profitable investment (compare, Kirsch et al., 2009). For instance, team members’ experience in the target market (MacMillan et al., 1985; Pintado et al., 2007; Roure & Maidique, 1986) and performing the requisite tasks (MacMillan et al., 1987) indicates whether they have the knowledge and capabilities that are required to run the new venture in the selected market. Relatedly, team members’ leadership (Zacharakis & Meyer, 1998), managerial experience (Colombo & Grilli, 2010), and articulation abilities (MacMillan et al., 1987) indicate whether the entrepreneurial team can effectively communicate with stakeholders such as employees, customers, and suppliers to obtain essential resources for growing the new venture. Moreover, the way in which the entrepreneurial team manages the associated risks may influence VCs’ evaluation of the operational risks of the new venture directly (Dubini, 1989). If VCs perceive that the team is unable to control such risks effectively, they are more likely to identify the new venture as a high-risk investment and consequentially reduce the amount they invest to minimize their own financial risk (Zutshi et al., 1999).

Research gap: How do VCs evaluate entrepreneurial teams?

Although previous studies have highlighted entrepreneurial teams and their characteristics in the context of VCs’ investment decision-making, we still lack an understanding of “how” VCs evaluate entrepreneurial teams and “how they [VCs] decide which ventures to support” (Robinson, 2022, p. 651) – i.e., the methods that VCs consistently adopt to determine whether an entrepreneurial team fulfills the required criteria. This oversight is likely due to the tendency of VCs to keep their internal evaluation processes and the resulting successes secret (Gompers et al., 2020). In extreme cases, VCs might not even be aware of their own decision-making processes (Zacharakis & Meyer, 1998), which cannot be easily captured through the quantitative approach commonly used in previous studies (Colombo & Grilli, 2010; Cumming & Zambelli, 2017; Franke et al., 2008; Guenther et al., 2022; Pintado et al., 2007); this situation undermines researchers’ ability to theorize regarding the patterns exhibited by VCs’ evaluation processes.

This lack of knowledge regarding VCs’ evaluation patterns is problematic because it prevents us from theorizing concerning the ways in which the criteria discussed in the previous section are taken into account by different VCs (Nunes et al., 2014). As Zutshi et al. (1999, p. 19) argue, “the type of decision-making process […] may also influence the decisions made by the VCs.” In turn, knowledge of VCs’ approaches to evaluation can affect the success of new ventures, which require the capital and resources of VCs to scale up their businesses. Thus, examining the ways in which VCs evaluate entrepreneurial teams can not only improve our theories of VC firms’ investment decision-making processes; it also has important practical implications that can allow entrepreneurs to advocate for their proposals more effectively with respect to potential investors and thus secure financing for their new ventures (Croce et al., 2017). Therefore, in this study, our research question examines the following question: how do VCs evaluate entrepreneurial teams when making investment decisions?

Methods

We used a multiple case study approach to identify the heterogeneous approaches that VCs may consistently employ to evaluate entrepreneurial teams for initial investment (Eisenhardt, 1989). Specifically, we employed an inductive method to develop a new theoretical framework to differentiate among the approaches used by VCs to evaluate entrepreneurial teams in which they have not invested before (either alone or in collaboration with other investors). We grounded our theoretical framework on rich empirical data from the field while avoiding the potential bias caused by a predefined conceptualization (Gehman et al., 2018). Moreover, the use of multiple case studies enables us to compare similarities and differences across diverse cases and thus develop a framework that takes into account the potential boundary conditions that account for variations (Eisenhardt et al., 2016). This approach improves the accuracy, robustness, and generalizability of our framework (Eisenhardt & Graebner, 2007).

Data collection

We followed the snowball sampling principle (Babbie, 2020) to select VC cases. First, we contacted six VCs via the first author’s personal network. After interviewing these VCs, they referred us to other VCs from different firms. We concluded the sampling procedure when theoretical saturation was reached (Eisenhardt, 1989). Specifically, after we conducted interviews with a new VC case, we coded the interview data and compared the codes with those from the previously collected data on hand. In this procedure, we tried to capture the “extreme variations of each concept” (Guest et al., 2006, p. 65) and “stretch diversity of data as far as possible” when developing our theoretical framework (Glaser & Strauss, 2009, p. 61). We determined theoretical saturation after analyzing the last five VC cases, in which we identified no new codes from the interview data. That is, the information from the new interview data produced “little or no change to the codebook” (Guest et al., 2006, p. 65). Therefore, we stopped adding new cases since there was “minimal incremental learning” (Eisenhardt, 1989, p. 545), as the additional interview data overlapped with what we had already observed from the other sampled cases.

The final sample consisted of 15 venture capitalists located in Europe and the US (see the overview of our sample in Table 2). In our sample, we focused on experienced venture capitalists with in-depth knowledge of the investment procedure in their firms. In particular, our interviewees held partner or managerial positions, suggesting that they were key informants with extensive information and ability to influence firm decisions (Solarino & Aguinis, 2021). Moreover, each interviewee came from a different company, allowing us to capture variations across organizations. The inside knowledge, similar backgrounds (in position and educational level), and variety of VCs in our sample allowed us to develop a framework that not only theorizes different evaluation processes consistently adopted across investment decisions within each VC case but is also generalizable across diverse organizations (Gehman et al., 2018).

Table 2. Overview of the sample.

Identity number	Location	Investment stage	Investment sector	Firm size (that is, number of employees)	Experience (as VC) in years	Position	Education
VC#1	Germany	Early stage	Cleantech	8	10	Managing Partner	Engineering (PhD)
VC#2	Switzerland	All stages	Diversified	38	11	Managing Partner	Business Administration (MSc)
VC#3	US	Early stage	Software	9	17	President	Business Administration (MBA)
VC#4	US	All stages	Technology	37	13	Investment Director	Business Administration (MBA)
VC#5	Netherlands	Early stage	Energy	10	15	Managing Partner	Engineering (MSc)
VC#6	Germany	Early stage	Software	45	5	Partner	Law (JD)
VC#7	Switzerland	Early stage	Diversified	5	6	Partner	Business Administration (MSc)
VC#8	Germany	All stages	Technology	25	11	Partner	Engineering (MSc)
VC#9	Germany	Early stage	Energy	50	9	Investment Manager	Engineering (MSc)
VC#10	Germany	Early stage	Energy	50	3	Investment Manager	Business Administration (MSc)
VC#11	Switzerland	Early stage	Cleantech	10	2	Managing Partner	Computer Science (MSc)
VC#12	US	All stages	Diversified	6	13	Partner	Business Administration (MBA)
VC#13	Switzerland	All stages	Life Sciences	8	11	Director	Business Administration (MBA)
VC#14	US	Early stage	Insurance	5	6	Principal	Business Administration (MBA)
VC#15	Switzerland	Early stage	Medical	4	11	Partner	Business Administration (PhD)

Note. Columns 2 to 5 (from location to firm size) denote the firm characteristics, and columns 6 to 8 (from experience to education) describe the individual characteristics of the interviewees.

We interviewed each of these 15 VCs to gain insights into their “perceptions, understandings, and experiences of a given phenomenon” (Ryan et al., 2009, p. 309). Specifically, we used semi-structured interviews to ask VCs to elaborate on their experience and thoughts, following a set of predefined questions regarding the process by which they evaluate new ventures, including the importance of the entrepreneurial team to their decision-making, the team characteristics they consider, the methods they employ to evaluate entrepreneurial teams, and the time they allocate to evaluating the team (see the interview protocol in the Appendix). Following interviewees’ answers to these predefined questions, we asked individualized questions to elicit further details without researchers’ excessive control and restriction of the conversation (Solarino & Aguinis, 2021). The interview questions focused on the general evaluation approaches used by VCs rather than hypothetical approaches (which may not reflect reality) or extreme historical examples (which may lack generalizability to the daily decision-making of VCs).

After completing the initial interviews with each of the VC (which took approximately 30 min on average), we conducted additional follow-up interviews (lasting approximately 20 min) to clarify certain responses from the first interview. In addition, we compiled field notes documenting our observations when interviewing the VCs. Overall, our data consisted of 188 single-spaced pages of interview transcripts and field notes.

Data analysis

We analyzed the data following Eisenhardt’s (1989) approach to multiple case studies. First, we conducted a within-case analysis by summarizing each VC’s approach to the evaluation of entrepreneurial teams, including the characteristics on which he or she focuses, the time that he or she spends evaluating the team, and the methods and tools that he or she employs to facilitate such evaluation. Second, we continued by conducting cross-analysis between cases to identify their similarities and differences as a means of developing our initial theoretical framework to differentiate among heterogenous approaches to evaluation. Then, we compared the initial framework with the literature to finalize the framework and refine its validity.

Specifically, we coded our data by following the process of Strauss and Corbin (1998). We first adopted open coding by closely examining the interview data to identify shared characteristics, including what team characteristics VCs commonly examine (for example, experience and skills) and their evaluation processes (for example, procedure and time). After comparing the similarities and differences among these characteristics, we performed axial coding by linking shared characteristics to generate higher-level dimensions (Aguinis & Solarino, 2019), including the five dimensions of team characteristics (commonly evaluated by VCs, that is, experience and qualifications, intrinsic motivation, drive and grit, complementary skills, and ability to communicate; see Figure 1) and the three dimensions of evaluation approaches (that is, structure, objectiveness, and time-intensity; see Figure 2).

Figure 1. Dimensions of team characteristics examined in VCs’ evaluation.

Figure 2. Dimensions of VCs’ evaluation approaches.

These higher-level dimensions (discussed in detail in the next section) served as the core constructs to help us identify variations in our data (Strauss & Corbin, 1998), that is, the conditions when our cases varied from each other. For instance, the three dimensions (that is, structure, objectiveness, and time-intensity) enabled us to differentiate the cases and their evaluation approaches based on the extent of the structured procedures, the objectiveness of the evaluation process, and the intensity of the time dedicated to the overall process. In the within-case analysis, we rated how a specific case performed in the three dimensions, such as how many structured procedures were conducted, how subjective the judgment was, and how much time it took to complete the evaluation. Afterward, in the cross-case analysis, we examined the similarities and differences in these dimensions across cases and identified several distinct patterns (that is, evaluation approaches; see the detailed discussion in the Findings section), with a particular pattern sharing similar ratings in the three dimensions.

Finally, we reiterated the analytical process (Guckenbiehl & Zubielqui, 2022) by comparing the emerging theoretical framework with previous studies on VCs’ investment decision-making. For instance, when theorizing the evaluation approaches, we relied on the commonly identified approaches in the literature, that is, the subjective approach (Drover et al., 2017), and the recently emerging approach in the entrepreneurship literature, that is, the scientific approach (Zellweger & Zenger, 2021), to help us theorize the two main groups of approaches in our findings – intuitive and rational approaches, respectively. For intuitive approaches, we refined the existing theory by looking beyond subjective opinions to consider variations in objectiveness and time-intensity. For rational approaches, we identified how the scientific approach (Camuffo et al., 2020; Zellweger & Zenger, 2021), that is, long and structured procedures, can also have variations, depending on how such procedures are used differently together with the subjective judgment in making the final investment decision. This iterative approach enabled us to improve the internal validity of our framework (Yin, 2002) by categorizing the distinctive team characteristics² and approaches that VCs use when evaluating entrepreneurial teams.

Findings

Dimensions of team characteristics evaluated by VCs

Based on the three dimensions (that is, structure, objectiveness, and time-intensity) shown in Figure 2, we identified five distinct approaches that VCs may use to evaluate a new venture and its entrepreneurial team, which are presented in detail in the following section. Each approach employs different ways of evaluating certain common characteristics of entrepreneurial teams. In particular, our analysis reveals the five most commonly examined dimensions of team characteristics: (1) experience and qualifications, (2) intrinsic motivation, (3) drive and grit, (4) complementary skills among team members, and (5) the ability to communicate the vision.³

Experience and qualifications indicate whether the founding team is capable of realizing its entrepreneurial project by developing a functional new venture and securing funding (Colombo & Grilli, 2010; MacMillan et al., 1985). Such past experience indicates that the entrepreneurial team was recognized by other stakeholders who were willing to invest in it, signaling its potential to build a functional and successful new venture. For instance, VC#14 indicated that team members’ experience in related sectors enables them to have “unique insight into this market opportunity.” Similarly, VC#1 emphasized the importance of founders’ experience when evaluating the potential of a team:

In the best-case scenario, the founders have done it [founded a venture and raised capital] before. If you find a serial entrepreneur who has already done it two, three, four, five times, with at least one success, that is great.

In addition to past experience, founders’ intrinsic motivation is another important characteristic that VCs examine to evaluate whether the team is committed to the new venture. Intrinsic motivation is related to the concept of entrepreneurial passion from Cardon et al. (2009, 2013). Entrepreneurs’ passion tends to serve as a driving force for their motivation for more commitment (Breugst et al., 2012) and attaining their goals (Baron et al., 2012), leading to a greater chance of success (Mueller et al., 2017). For instance, VC#13 emphasized founders’ “passion” as motivation for projects when evaluating a new venture. Without a strong intrinsic motivation, VCs fear that team members may not dedicate themselves fully to solving the problems they face when expanding their new ventures. As VC#6 described this situation,

You want to have a team where you understand that the issue they are working on is not something that just flew by but something that touches the core of their professional or personal careers. They have seen a problem that is bugging them so much that they need to solve it.

On a related note, VCs also search for teams that have the drive and grit to weather the difficulties that are inevitable during the start-up process. According to Mueller et al. (2017, p. 263), drive and grit capture an entrepreneurial team’s “sustained pursuit of long-term goals” – that is, “working assiduously through challenges, failure, and adversity, and maintaining this effort and interest over time.” Such affective drive motivates entrepreneurs to continue their behaviors even when facing the negative affect resulting from uncertainty and challenges in the environment (Hayton & Cholakova, 2012). For instance, VC#11 described the consideration of entrepreneurs’ drive and grit as “ability to stick with things, to get through problems, to get through difficult phases, [and] to solve problems.” As VC#5 further elaborated, “there will be many disappointments […] you do not want people who are too quickly deterred and prevented from building the company.”

Moreover, VCs examine whether team members have skills that can complement each other. A team that includes diverse skills enables the division of labor and the achievement of synergy when accomplishing tasks (Franke et al., 2006). As VC#2 described this situation, “ultimately, you need to have everything mapped out as a competence that contributes to the success of the company – ideally not in a single person but in a team that complements each other well.” VC#1 added the following: “we examine whether the [team] is complementary – not something like three super technologists and but no business person, no sales person, and no finance person.”

Finally, when the founding team approaches VCs, it is important for the team to be able to communicate its vision and business model clearly. This ability is especially important during the pitch (Piazza et al., 2023), when VCs determine whether the team is “able to communicate and inspire regarding this problem” (VC#6). In addition to inspiring the audience, the team is expected to “communicate with different stakeholder groups in an authentic way” (VC#4); otherwise, VCs find it difficult to relate to and believe the proposed business ideas. This characteristic also signals the team’s future marketing ability when selling their products/services to clients. VC#12 noted that “it is all about marketing – to be able to raise capital gives you the ability to recruit and pay better engineers and then to have more shots on goal.”

Types of approaches

Our analysis identified five approaches (see Table 3) that VCs may adopt to evaluate the aforementioned team characteristics. Specifically, we differentiated these approaches based on three dimensions: the extent of the incorporation of structured procedures (for example, the systematic adoption of specific tools), the objectiveness of the evaluation process (for example, whether or not the VCs rely on their personal judgments), and the intensity of time dedicated to the whole evaluation process.

Table 3. Types of evaluation approaches.

Type	Structure	Objectiveness	Time-intensity	Methods	Interviewees
Intuitive approach	Unstructured	Subjective	Low time-intensity	Work samples, reference interviews,	VC#3, VC#12
Extended intuitive approach	Semi-structured	Subjective	Moderate time-intensity	Document analysis, work samples, reference interviews, beer due diligence	VC#6, VC#11, VC#13
Systematic intuitive approach	Semi-structured	Subjective	High time-intensity	Document analysis, work samples, reference interviews, beer due diligence	VC#7
Psychological rational approach	Structured	Objectivized	High time-intensity	Document analysis, work samples, reference interviews, (longer) beer due diligence, psychological assessment, score to objectivize the evaluation	VC#1, VC#4, VC#5, VC#8, VC#14, VC#15
Scientific rational approach	Structured	Objective	High time-intensity	Document analysis, work samples, past-oriented interviews, reference interviews, stress interviews, simulations, database and evaluation reports	VC#2, VC#9, VC#10

The extent of the incorporation of structured procedures refers to the explicit requirements that are detailed in VCs’ evaluation processes. In structured approaches, VCs tend to establish concrete milestones and clear steps to guide their evaluation processes. In semi-structured approaches, VCs allow for a certain amount of flexibility when evaluating different new ventures. That is, VCs do not apply the same methods to every evaluation of a new venture, and their methods can vary depending on the particular entrepreneurial team in question. For instance, VC#11 does not always perform a “team deep dive” – that is, conducting one-to-one interviews with key members to understand the team and its dynamics. Similarly, VC#7 may skip one or two steps in the evaluation process if he personally knows the founders or trusts the referents who introduced the entrepreneurial team. However, these VCs continue to employ certain structured steps (such as document analysis) when evaluating entrepreneur teams in general. In comparison, unstructured approaches include no predefined steps or guidance concerning how to evaluate entrepreneurial teams; VCs make their evaluations on a case-by-case basis.

Objectiveness indicates whether VCs’ evaluation decisions are supported by objective data or by VCs’ own perceptions. In objective approaches, VCs collect and analyze data to determine whether entrepreneurial teams satisfy prespecified criteria. They adopt this approach to minimize the impact of personal bias and to ensure comparability among the new ventures they evaluate. In less objective approaches, which we call “objectivized approaches,” VCs allow their subjective opinions to affect their evaluations of entrepreneurial teams to a certain extent based on the prespecified criteria. In both objective and objectivized approaches, VCs document their interpretations and comments in evaluation reports so that any third party can make sense of their evaluation decisions. In subjective approaches, VCs mainly rely on their gut feelings when making decisions and do not employ objective criteria to facilitate their evaluation processes. Therefore, a third party may find it difficult to make sense of decision outcomes based on subjective approaches, as no objective data or elaborations of the decision-making processes are provided.

Time-intensity indicates the time that VCs spend evaluating each entrepreneurial team. In highly time-intensive approaches, VCs dedicate more than six months or as long as a year to the task of evaluating a new venture. In moderately time-intensive approaches, VCs spend a shorter time evaluating each entrepreneurial team, that is, two to three months on average. In the least time-intensive approaches, VCs spend minimal amounts of time evaluating each entrepreneurial team, such as a period of one month or even one day.

Intuitive approaches

There are three types of intuitive approaches, which are grounded on VCs’ subjective opinions, accompanied by either unstructured or semi-structured procedures. These approaches may exhibit various levels of time-intensity throughout the evaluation process.

Intuitive approach

An intuitive approach involves an unstructured procedure according to which VCs rely on their own subjective evaluations and make decisions in a very short timeframe. That is, VCs rely on their past investment experience to form a subjective opinion of the entrepreneurial team quickly. As VC#3 indicated, “you usually make up your mind about the team at the beginning, within the first three calls or meetings.”

VCs who employ the intuitive approach do not implement structured procedures to evaluate a team carefully over a specific timeframe. Instead, they focus mostly on the subjective characteristics of the team, such as whether the team has demonstrated its ambition, drive and grit, and openness to feedback without exhibiting arrogance. As VC#3 explained this approach,

I have lost [all my investment in] companies because the entrepreneurs were stubborn, and now we do not invest in anybody that does not listen to us. They do not have to do what we tell them, but they need to listen and think about it.

To learn about such characteristics over a very short period of time, VCs form their opinions mainly during the process of communication with the entrepreneurial team when it articulates its vision and attempts to convince stakeholders of the benefits of its products/services. Although more objective characteristics, such as the team’s industry and work experience, are also relevant, VCs using this intuitive approach considered them only as additional information.

As this approach relies mostly on the VCs’ interpersonal communication and interactions with the founders, it does not include prestructured procedures for evaluating teams. For instance, this approach does not involve interviews focusing on the team’s previous experience (that is, past-oriented interviews) or an in-depth analysis of the team’s documents such as CVs (that is, document analysis). Instead, VCs form their opinions based on the ways in which the team responds to their e-mails or interacts with them during meetings. In addition, VCs conduct interviews with selected team members and employees (that is, work sample) to gain information regarding team dynamics. Moreover, VCs validate their opinions by conducting reference interviews with external stakeholders who have engaged in business-related or private interactions with the team. For instance, they pay close attention to the opinions of other investors, the board of directors, and advisors. These members tend to be selected by the team itself and may thus provide insights into the “founders” way” of running the business (VC#12), thereby facilitating VCs’ decision-making.

Despite the reliance on observations of these interpersonal interactions, VCs who employ the intuitive approach do not systematically document the whole evaluation process. Instead, based on their early impressions of the entrepreneurial team, they spend a very limited amount of time evaluating the team and quickly decide on the likelihood of the new venture’s success, making their decision to invest in a particular new venture on this basis. However, VCs’ quick evaluation taking the intuitive approach may be biased by their initial impression of the entrepreneurial team. For instance, VC#12 personally favored team members from a poor family background and assumed they had strong intrinsic motivation to scale-up the start-up. Such reliance on personal intuition may result in random subjective bias, which cannot be systematically captured across investment decisions (compare, Franke et al., 2006).

Extended intuitive approach

An extended intuitive approach tends to feature a semi-structured procedure and engaging interactions with the founders prior to the eventual signing of the investment agreement. Although this approach still involves subjective evaluation, it features a wider range of methods that require more time before VCs are able to reach a decision.

Compared to the intuitive approach, the extended intuitive approach pays more attention to the professional experience of team members in the industry sector in which the new venture operates. Specifically, VCs who employ this approach examine whether the team has the competence to scale-up its project but is simultaneously not constrained by long experience in the field. As VC#6 explained,

Experience is sometimes also a bit of a crux. [Although experience is essential], too much experience is sometimes not good either. Too much experience somehow leads you into well-trodden paths [and might hinder creativity].

In addition to previous experience, VCs who employ this approach expect team members to be able to articulate the venture’s vision and to inspire stakeholders regarding their project. This communication ability also indicates whether the team is able to attract required human resources as a “kind of talent magnet” (VC#11). Furthermore, this approach takes into account the founders’ intrinsic motivation and investigates whether the founders genuinely care for the targeted problem in the sector rather than pursuing merely personal wealth. That is, “they [the team members] want to do this [entrepreneurial project] and they have a passion for it” (VC#13). However, VCs who employ this approach may not necessarily evaluate all these team characteristics systematically across different cases. As VC#6 described this strategy, “what we look for is very different depending on the product and sector.” As such, VCs do not always have a written analysis of these team characteristics and instead keep the “list in [one’s own] head” (VC#6).

Importantly, the extended intuitive approach involves more methods of evaluating an entrepreneurial team than does the intuitive approach. For instance, VCs using this approach are similar to those who employ the intuitive approach in that they conduct interviews such as work samples with the new venture (including the entrepreneurial team and employees) to learn about the team dynamics and distribution of responsibilities, including the ways in which team members solve problems and overcome challenges during the start-up process. They also conduct reference interviews with external stakeholders to validate their impression. The questions asked during these interviews tend to be based on a set of predefined questions that is developed after VCs conduct document analysis of the team members’ resumes.

The extended intuitive approach offers an additional way of helping VCs learn more about the entrepreneurial team – so-called “beer due diligence.” That is, VCs use informal meetings, such as dinner or hanging out, as additional forms of social interaction “to get to know different sides of [the founders] and what they like to do” (VC#13). This strategy enables VCs to improve their understanding of “the life context [of the founders]” (VC#13) and, in particular, founders’ personalities and social environments, which ultimately assist VCs in making investment decisions. VC#13 described this process as follows:

I try to go out for a beer with the founders after the interview to loosen up the atmosphere, to put it into a different context, to take out a bit of the tension, to get rid of the interview situation and to create a dialog. You learn a lot about your fellow diners and guests on an evening like this […] that can also be very valuable.

However, even after these additional social interactions, VCs who employ the extended intuitive approach continue to emphasize the fact that their gut feeling is an “important factor” (VC#6) when evaluating an entrepreneurial team. Specifically, VCs use their subjective impressions based on “every interaction” with the founders (VC#11) over a period of two to three months. Their final decisions tend to emerge from an iterative accumulation of their opinions after considering each “good” or “bad” interaction. As VC#11 summarized this situation,

Many things come out while working together. The collaboration already starts with the first pitch. After that, there are all kinds of proxies: response time; behavior; how they communicate in general; how they follow-up and follow-through; how they deal with people; what they have built up so far; how they have built it up; how much love you somehow sense in the way they build things up; which people they have attracted; which people work with them.

Overall, the extended intuitive approach includes more structured procedures (for example, predefined interview scripts and document analysis) than the intuitive approach, even though the former does not always maintain consistent documentation throughout the whole process. Similar to the intuitive approach, this approach relies on VCs’ gut feelings, but those who employ the extended intuitive approach spend more time engaging founders in additional forms of social interaction to validate their subjective evaluations, attempting to mitigate the potential random bias. In other words, these VCs also do not believe in quantitative evaluation but instead consider only qualitative evaluation. As such, they spend most of their time interacting with the teams both in formal and informal settings.

Systematic intuitive approach

In our analysis, we also identified one rare approach – the systematic, intuitive approach. Although this approach exhibits similar characteristics to those of the extended intuitive approach, including the use of semi-structured procedures involving subjective evaluations, it requires a much more extensive time commitment and a longer period of evaluation (lasting up to one year).

The systematic intuitive approach is similar to the extended intuitive approach with respect to examining team characteristics. For instance, VCs who employ the systematic intuitive approach focus closely on team members’ technical experience and skill complementarity. As VC#7 noted,

It is important to have someone who understands the technology they are working on but also someone who understands the commercial part. It is always good to have someone who can execute sales and distribution well.

In addition, VCs using this approach consider the team members’ intrinsic motivation – whether they are interested in bringing innovation to the field rather than merely exploiting a market opportunity. As such, members’ motivation indicates whether they have the drive and grit to persist in making innovations in the field, despite the potential negative pushback from the start-up process. As VC#7 explained this situation,

I want to understand whether this is someone who really wants to build something or an opportunist who says, ‘this is a good opportunity for me now.’

Although the systematic intuitive approach involves similar procedures to those used in the extended intuitive approach to evaluate the aforementioned team characteristics, the main difference between the two lies in the amount of time that the former approach requires to perform those procedures. That is, the systematic intuitive approach tends to take up to one year before VCs decide whether to invest in an entrepreneurial team. As VC#7 noted,

We specifically try to get to know founding teams that are too early for our [investment focus]. Then, we communicate with them every three to four months. Based on that, we build up a history of the founders’ behavior. The founders tell you what they intend to do, and we note that in the CRM [customer-relationship management software]. Three to four months later, we make an update call and see whether they achieved it [that is, the entrepreneurial goal]. Moreover, over time you can better assess the people; for instance, are they exaggerating or underplaying? That [assessment] usually goes on for a year. That is, a history builds up, and you get to know the founders. […] and there you try to find out whether you would like to work with them for the next five to ten years.

More specifically, VC#7 observes and assesses founders and their development over a long period of time. The VC conducts meetings every three months with the corresponding entrepreneurial team and documents the whole process, including by producing an evaluation of whether the founders overestimate their achievements, learn from their mistakes, and incorporate feedback into their business model. These evaluation processes tend to occur during the deal sourcing and screening phase of potential new ventures. During this phase, VCs not only evaluate founders’ CVs, but also meet them in informal contexts (that is, beer due diligence). Based on information collected from the formal documents and informal interactions, VCs develop a case profile of the entrepreneurial team and highlight members’ strengths and weaknesses. Then, during the subsequent evaluation phase involving due diligence, VCs confirm their evaluations by conducting reference interviews with external stakeholders and continuing to collect information from work samples and all the follow-up interactions in which they engage with the entrepreneurial team.

However, throughout the entire evaluation process, VCs continue to value their gut feelings highly: “I often think based on my gut feeling [when assessing founders]” (VC#7). That is, the VC’s personal feelings continue to play an important role in determining how he or she uses the collected information. For instance, VC#7 sometimes questioned the value of a founder’s past experience and argued that “the past has nothing to say about the future. Nothing at all! I have seen so many people who failed so many times in the past and then suddenly built up a huge company.” However, VCs who employ the systematic intuitive approach tend to allocate a significant amount of time to various procedures and social interactions with the entrepreneurial team to validate their subjective feelings before making the final investment decision while limiting potential random bias. VC#7 summarized this process as follows:

Everything we do is always done in cooperation with the founders. In this exchange, we learn a lot about the founders in every interaction. So, it takes [at least] the same amount of time for the team as it does for the [evaluation of the] market and business model because we are always in exchanges with the team during this process.

Rational approaches

Compared to the three intuitive approaches discussed above, which focus on VCs’ own subjective feelings, we categorized two approaches as rational approaches. These approaches tend to involve well-structured procedures that require large amounts of time. The detailed analyses and explanations enable any third party to make sense of the final decision, minimizing the personal subjective bias of VCs. The difference between the two rational approaches lies in the ways in which VCs use the results of their structured procedures to make their final investment decisions.

Psychological rational approach

The first rational approach is called the “psychological rational approach.” VCs who employ this approach attempt to objectivize their subjective opinions and gut feelings when performing a well-structured but time-consuming evaluation procedure. They accomplish this task by giving a score to the team under evaluation based on the team characteristics that they deem to be important, and they hope that such a scoring system can make their evaluations comparable across cases. For instance, they may rate the level of team members’ experience in the sector or speculate regarding their drive and grit based on the members’ past histories when giving a score to a team.

Specifically, the procedure used in the psychological rational approach begins with the VCs’ gut feelings when screening for potential new ventures for investment, including an evaluation of the proposed business model and its sector. Through iterative interactions between documents and social interactions, VCs formulate their initial feelings regarding a target firm, as VC#4 explained:

The management team should know that every time they talk to an investor, the investor is trying to figure out whether to back them or not. […] It is going to be implied in every interaction.

In the next step, VCs perform due diligence using more extensive procedures, including document analysis of individual team members’ CVs, interviews with key employees, reference interviews with external stakeholders, and beer due diligence. Unlike the extended or systematic intuitive approach, in which VCs may spend merely one to two hours in an informal meeting to familiarize themselves with the entrepreneurial team, VCs who employ the psychological rational approach (for example, VC#4) spend an entire day with the entrepreneurial team to interact with the team over a longer period of time and understand how the team operates. For example, VCs may organize a company tour at the entrepreneurial team’s office, conduct brainstorming sessions to discuss the future of the company (via work samples), or invite the team for dinner and drinks (that is, beer due diligence). Another difference is that VCs using this approach may employ an external specialist to conduct a psychological assessment of the entrepreneurial team members. Even though such an assessment tends to be viewed as additional information to supplement the other procedures conducted by the VCs themselves and does not influence the investment decision directly, VCs still value the information highly. As VC#4 noted,

We have a consultant who does it [psychological assessment of the entrepreneurial team] for us. It can help [us] understand how someone is wired and understand the team dynamics. That [psychological assessment] tends to be more of an information-gathering exercise, finding out the team construction and less about the threshold question [for evaluating a team], i.e., do we trust someone or not. Nevertheless, it is still a valuable part of our process.

After completing the evaluation process, VCs who employ this approach document all the information thus obtained and determine a score for the entrepreneurial team in question. However, this score is based primarily on the VC’s gut feelings and not necessarily on a metric rooted in calculations. As VC#8 described the score,

We try to quantify [the evaluation process …] We give the team a score from 1 to 9. […] Our experience is that as soon as there is a number, the discussion starts.

These scores allow VCs to compare the evaluated team with other teams (VC#14) when deciding which team to invest in (VC#8). That is, the exact score is not actually critical to this process, but the teams’ rankings and comparisons to one another based on the scores are key to VCs’ internal discussions and final investment decisions. As such, VCs using the psychological rational approach develop quantitative scores for the entrepreneurial teams under evaluation. Although the scores are based on their gut feelings, VCs using this approach implement structured procedures over a long period of time to “explain the reasons” for which they provided a particular score to a specific entrepreneurial team (VC#4).

Scientific rational approach

The second rational approach – the scientific rational approach – differs from the psychological rational approach in that the former combines VCs’ gut feelings with an objective evaluation after implementing structured and time-intensive procedures. Instead of using evaluation procedures merely to explain their gut feelings, VCs adopting this approach develop their subjective opinions mainly during the initial stage and focus more on the objective information collected using a wide range of analytical tools and procedures over a long evaluation period. As VC#9 described, “the tool is very valid, and I think the approach is great. Nevertheless, the gut feeling is still important and dominant at the beginning of the process.”

In this approach, VCs particularly emphasize team characteristics related to organization, such as planning ability, result orientation, and adaptability to a changing environment (for example, VC#9 and VC#10). In addition to these organizing abilities, they take into account a wide range of team characteristics, including members’ knowledge of and experience in the targeted sector (for example, VC#2), risk management abilities, proactiveness, motivation, and drive to scale-up the new venture.

Specifically, this approach typically requires the VC to spend a long period of time implementing a wide range of procedures to evaluate the aforementioned team characteristics. During the initial screening stage, VCs analyze the documents prepared by the entrepreneurial team, including team members’ resumes and the business plan describing the venture’s products and business model. VCs may even ask the entrepreneurial team to complete an initial questionnaire to provide information regarding their skills, networks, and responsibilities in the new venture. VCs can then share information drawn from these initial documents via their internal database to make an initial comparison with other new ventures, whether current or past. For instance, VC#2 mentioned the following:

We have our own data analytics. We have 1.8 million start-ups mapped in our database and […] 2.5 million founders. It is completely automated.

Based on this initial comparison, VCs develop a preliminary opinion of the team under evaluation and continue to implement a series of procedures to define the quality of the team. As VC#10 stated,

We do not want to base the assessment on a gut feeling but rather on the factors and character traits that distinguish the team, which we want to determine objectively. [Our process] is evidence-based, which means we look at concrete evidence to evaluate certain character traits or characteristics of the team.

The procedures used in this approach are more comprehensive than those used in other approaches, including interviews focused on work samples that are intended to allow the VC to understand the team dynamic, interviews with team members to obtain more detailed information regarding their past experience (that is, past-oriented interviews), reference interviews with external stakeholders, and particularly stress interviews – a method used to “challenge [the founders] just to see how they respond” (VC#2) – in which VCs “ask deliberately provocative questions and see how they deal with them” (VC#2). In this context, VCs are “not interested in the answer but the reaction” (VC#2). This procedure allows VCs to see how the entrepreneurial team reacts to and overcomes stress, which is common during the start-up process and affects the eventual success of a new venture (Rauch et al., 2018).

Moreover, VCs who employ this approach may even organize simulated tasks for the entrepreneurial team, such as mock meetings, calls, and e-mail correspondence. VCs can track and rate not only the skills of each individual member, but also the team dynamics and the ways in which the team solves the tasks at hand. VCs may offer several simulations to the team under evaluation to ensure the reliability of the evaluation. However, this procedure is not a mandatory criterion for the final investment decision. Rather, it is used as a way of examining the team and obtaining a feeling regarding the skills and competences of the team members. For example, as VC#10 noted, “in principle, this tool is not a hard knock-out criterion, unless it finally comes up with something quite catastrophic.” VC#9 concurred with this assessment:

It is not always something on which we necessarily make a decision, but it is something that helps us see where we can support the completion of the team so that we have a better starting position for later.

After analyzing all the information gathered through the aforementioned procedures, VCs compile a report that contains scores and diagrams summarizing the characteristics of the team under evaluation. For instance, VC#2 shared that “there is a score for each [evaluated] dimension. From these scores, an overall score of one to 21 is then formed.” Based on this report, VCs can also include own comments, which allow any third party to understand the ways in which VCs make sense of the report when making their final investment decisions while minimizing the potential concern of any third party regarding their personal, subjective bias. As VC#10 summarized this approach:

At the end, a comprehensive report is generated. The evaluator is required to comment on the report and put it into relation [to other evaluations of start-ups]. Thus, someone uninvolved in this assessment can also interpret the results and know what this says about the team.

In summary, VCs who employ the scientific rational approach implement a series of structured procedures over a long period of time to evaluate an entrepreneurial team. Rather than focusing on the task of comparing the teams under evaluation (as in the psychological rational approach), this approach focuses on each team’s own score, which includes supportive evidence and facilitates transparent interpretation. This approach allows not only the related parties, that is, VCs and the team under evaluation, but also any third party to make sense of the investment decision that is ultimately made.

Discussion

Although previous studies have highlighted the importance of entrepreneurial teams’ characteristics (Drover et al., 2017), such as members’ previous work experience (Colombo & Grilli, 2010; Croce et al., 2017; Hall & Hofer, 1993), leadership abilities (Zacharakis & Meyer, 1998), and risk management (MacMillan et al., 1987), in the context of determining VCs’ investment decisions, our understanding of the evaluation processes they use – that is, how VCs evaluate those team characteristics – remains underdeveloped. Our study identified five distinct evaluation approaches that vary in terms of the extent of the use of structured procedures, objectiveness, and time-intensity of the process. The first three approaches (that is, intuitive approach, extended intuitive approach, and systematic intuitive approach) rely strongly on VCs’ subjective opinions to make decisions with varying levels of structured procedures and time commitment. In comparison, the other two approaches (psychological rational approach and scientific rational approach) feature developed and well-structured procedures and require a long period of time to generate transparent analyses that can be compared across the teams under evaluation.

These insights offer several contributions to the VC literature. First, our findings suggest the emergence of diverse approaches to evaluation used by VCs. Specifically, previous studies have often highlighted the subjective nature of VCs’ evaluation process (Drover et al., 2017) – a claim that our findings support, as some VCs continue to base their investment decisions mainly on their own intuition (Gompers et al., 2020; Smart, 1999). However, we identified a trend similar to that reported by Huang and Pearce (2015) with respect to other early stage investors, such as angel investors, who have increasingly incorporated more objective analyses into their evaluation processes to justify their “gut feelings” and counter their potential bias (Narayanan & Lévesque, 2019). We found that VCs who employed extended or systematic intuitive approaches often collect additional data via interviews with stakeholders or informal meetings with entrepreneurial teams to support their intuition.

Moreover, we observed the emergence of more objective approaches that VCs adopt to evaluate entrepreneurial teams. This finding is consistent with the recent focus of entrepreneurship scholars on scientific approaches to entrepreneurship, which emphasize the value of quantitative data and analysis to facilitate entrepreneurial decisions (Camuffo et al., 2020; Zellweger & Zenger, 2021). We found that such a scientific approach has also become common among investors, such as VCs, who employ the scientific rational evaluation approach. VCs who employ this approach collect diverse types of data, including documents, interviews, and simulations, and rely on their databases to generate analytical reports. Even if some VCs do not necessarily care about the report itself, such as those who employ the psychological rational approach, these formal reports and analyses enable them to make quantifiable comparisons among potential new ventures to facilitate their eventual investment decisions. As such, our findings indicate an emerging trend according to which early stage investors may start shifting from an intuition-based approach to evaluation to a technology-driven and data-based approach.

Our differentiation between intuitive and rational evaluation approaches represents our second contribution, which can improve our understanding of variations in VCs’ decision-making processes, as VCs tend to employ their own distinctive approaches when making investment decisions (Guenther et al., 2022). Specifically, we extend previous research, which has claimed that VCs’ decision-making tends to be a dynamic process that is not purely based on merely a snapshot intuition (Petty & Gruber, 2011) or an initial analysis of the business proposal (Kirsch et al., 2009), by showing how VCs can iterate their gut feelings and data analysis in different ways. For instance, using intuitive approaches, different VCs spend varying amounts of time collecting additional data, such as by interviewing external stakeholders (in the case of the extended intuitive approach) or organizing different informal events with the entrepreneurial team over time (for example, in the case of the systematic intuitive approach), to refine their subjective evaluation. Similarly, using rational approaches, VCs’ initial subjective opinions are reshaped and presented in the form of a formal report after a long period of data collection and analysis. Given this refined understanding of the ways in which VCs differ in terms of how they combine their subjective thoughts with objective analysis, future studies can produce better analyses of VCs’ decision-making processes that can be used to predict their performance (Gompers et al., 2020).

Finally, we provide a more refined means of identifying the evaluation practices employed in different approaches. Previous studies have often focused on the most common evaluation practices, including VCs’ reliance on their own gut feelings (Gompers et al., 2020; Narayanan & Lévesque, 2019), reviews of team members’ past experience (Smart, 1999), and quantitative analysis of financial performance (Hall & Hofer, 1993). Our findings complement our understanding of these common practices by elaborating on informal practices, such as entrepreneurial team members’ social connections with other stakeholders, that have attracted recent scholarly attention (Cumming et al., 2022; Guenther et al., 2022). Specifically, information regarding the team’s behaviors in a private setting provides additional signals that can help VCs better understand the team under evaluation as well as its chances of successfully scaling-up the new venture (Drover et al., 2017). Our findings identify several important and under-researched practices that VCs may use to collect such information, including beer due diligence, in which context the VC has dinner with the entrepreneurial team, and stress interviews and simulations that allow the VC to observe the ways in which team members react to uncertainty and high demands, which are common during the start-up process (Lerman et al., 2021). As such, we not only support previous arguments regarding the importance of entrepreneurs’ sociopsychological characteristics to VCs’ decision-making (Baron et al., 2016; Wright et al., 1997) but also explicate the potential evaluation practices that future research may consider when examining VCs’ focus on informal cues related to the entrepreneurial team under evaluation.

Limitations and directions for future research

Our study is not without its limitations. First, our findings focus on the ways in which VCs evaluate potential entrepreneurial teams prior to making initial investment decisions. That is, we identify the evaluation approaches used mainly during the “pre-investment stage,” including deal sourcing, screening, evaluation, and due diligence. Our findings identify the development of specific evaluation approaches for first-time investments that are consistently applied by a VC but differ among VCs. As such, we focus on the emergence of diverse approaches in the pre-investment stage across VCs. However, our findings do not emphasize the “post-investment” stage, during which VCs may adopt different practices in their approaches to determine whether they will continue their investment in or exit the new ventures in which they invested (Gompers et al., 2020). For instance, after making an initial investment, VCs may have better access to information to observe how the team develops the new venture and whether it accomplishes its initial goals. Subsequently, VCs may change their evaluation approaches, such as when to engage other investors in the next round of investment to facilitate the scale-up of the new venture (Johan & Zhang, 2021), to make a follow-on investment, or to exit the investment to realize the financial return. Furthermore, in post-investment evaluation, VCs may even require more objective data to conduct quantitative analysis rather than relying on their own subjective evaluations. As such, the evaluation approaches used during the post-investment stage may no longer rely on the intuitive approaches identified in our framework, resulting in a VC’s style drift (Cumming et al., 2009). Built on our between-case variations in evaluation approaches for initial investments, future research can investigate in depth within-case variations over time, such as the style drift of a VC when evaluating new ventures at the post-investment stage.

Second, as we focus on “how” VCs evaluate a potential new venture in the pre-investment stage rather than in the post-investment stage, we do not examine the outcomes of investment decisions – that is, the returns that VCs obtain from their investments. Although the VCs included in our sample shared their evaluation methods for determining the potential success rate of a startup (that is, the probability of scale-up), they did not provide objective measures of their returns from each investment decision. However, as for-profit VCs’ goal is to obtain significant financial returns from investing in successful new ventures, future research can examine which of the evaluation approaches identified in our study leads to the best performance outcomes in terms of VCs’ financial returns (compare, Gompers et al., 2020).

Moreover, our analysis focuses on the heterogeneity exhibited by the approaches to evaluation taken by independent VCs. As such, our attention is limited to the evaluation process used by a specific VC self – that is, the dynamic nature of its evaluation process iterating subjective opinions and various data collection practices – rather than interactions among VCs. However, collaboration among VCs and other stakeholders, such as co-investment with syndicated partners, other investors’ referral of potential new ventures, and involvement of external consultants, may alter VCs’ approaches to evaluation. For instance, they may spend more time on data collection and analysis to protect their reputation in the field (Guenther et al., 2022) or, in contrast, reduce their evaluation effort after learning inside information from their investment partners (compare, Drover et al., 2017). Hence, future research can extend our findings by considering interorganizational dynamics among VCs and investigating whether collaborative investment involves unique approaches to evaluation.

Another direction for future research is the heterogeneity in VCs’ own backgrounds and characteristics. Our findings are based on multiple for-profit VC cases with different backgrounds. However, different types of VCs, such as governmental or corporate VCs, may adopt different evaluation criteria and approaches (Bertoni et al., 2015). For instance, government-funded VCs may prioritize policy implications and societal contributions over financial returns (Drover et al., 2017). As such, future research may explore potential variations in evaluation approaches by different types of VCs. Moreover, the location of VCs may affect how close they feel to the entrepreneurial team and how they evaluate team collaboration (Cumming & Dai, 2010), such as the difference in evaluating teams working in the same physical location vs those working remotely. Although the VCs with rational approaches in our sample referred to location merely as a standard informational input, not team-specific information, in determining the score when evaluating a new venture,⁴ VCs’ location may be an interesting boundary condition for future scholars to examine the variations in our findings due to geographic distance.

Conclusion

An entrepreneurial team is often an important criterion for VCs’ evaluation prior to investing in a new venture. Although existing studies have highlighted the information signals that VCs can receive from the entrepreneurial team, we lacked a comprehensive theory of the ways in which VCs use different approaches to evaluate such a team. Our findings identified five distinct evaluation approaches that vary in terms of the structured procedures, objectiveness, and time-intensity of VCs’ practices. In summary, we highlight the diversity of VCs’ approaches to the task of evaluating the entrepreneurial team prior to making investment decisions. As such, future research can build on our work to improve our understanding of the ways in which VCs combine subjective evaluation and objective analysis in their decision-making processes.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was not supported by any funding.

Notes

¹ Our review followed the descriptive review approach by examining “empirical studies in a specific research area” (in our case, VCs’ evaluation of entrepreneurial teams for first-time investment) (Aguinis et al., 2023, p. 52). Specifically, we focused our review on empirical articles published in leading management and entrepreneurship journals, including Academy of Management Journal, Administrative Science Quarterly, Strategic Management Journal, Organization Science, Journal of Management Studies, Journal of Management, Journal of Business Venturing, Entrepreneurship Theory and Practice, Strategic Entrepreneurship Journal, Small Business Economics, and Journal of Small Business Management between 1985 (when the leading entrepreneurship journal, Journal of Business Venturing, was first published) and 2022. We refined our search with the keywords “venture capitalist,” “private equity,” “team,” “evaluation,” and “due diligence” in Web of Science and Scopus. We then reviewed the abstracts and texts of the initial samples to limit our review to only articles directly examining our research focus (Hiebl, 2021) – that is, for-profit VCs’ independent evaluations of entrepreneurial teams for first-time investment – which we summarized in Table 1.

² We followed similar procedures to analyze the team characteristics (that is, the core dimensions in Figure 1). First, in the within-case analysis, we examined whether VCs adopting a specific evaluation approach consider these team characteristics in their evaluation process. Afterward, in the cross-case analysis, we examined the similarities and differences between evaluation approaches regarding the team characteristics considered in the process. Finally, we reiterated the analysis by comparing our findings with the literature on VCs’ evaluation of entrepreneurial teams (Gompers et al., 2020; MacMillan et al., 1985; Zacharakis & Meyer, 1998).

³ The VCs in our sample referred to the personal backgrounds of the entrepreneurial team members as an information source to infer the team characteristics they consider important in the evaluation process. That is, VCs do not directly incorporate team members’ backgrounds into their evaluation process. As VC#6 shared, “Personally, I’m not very interested in what kind of training, degrees, and so on are available.” Instead, he focuses on the team characteristic of past experience and qualifications, stating that “I’m more interested in what can be documented, for example, has he [a team member] already implemented something?” VCs use team members’ personal backgrounds mainly to infer the important team characteristics that they value in the evaluation process. For instance, VC#12 used an individual’s under-resourced family and educational background to speculate about his/her intrinsic motivation, drive, and grit. Similarly, VC#7 looked at team members’ backgrounds to infer their motivation for the start-up. He stated, “If a butcher comes and says, ‘I want to set up a tech start-up,’ I would ask him, ‘What made you do that?’ I’m not saying you necessarily always need a degree or the greatest academic training, but you [VCs] have to be able to understand whether the people [entrepreneurial team members] can do what they want to do.” Therefore, the team members’ personal backgrounds play an indirect role in VCs’ evaluation process by signaling other team characteristics that VCs deem more critical.

⁴ For instance, VC#15 shared that “for location, we give like four points when it is just an hour drive from Geneva; we give three points when it’s in Switzerland; we give two points when it’s in DACH regions [Germany, Austria, and Switzerland]; one point when it is in Europe; and zero points when it’s outside of Europe.” He regarded this information as only “a certain factor” that is not specific to the team members in the evaluation process. Therefore, we have excluded location from our framework, given that we focus on how VCs evaluate the information specific to entrepreneurial team members.

Appendix

Interview protocol

Importance of the entrepreneurial team

1. When you evaluate a new venture for a first-time investment, how important is the entrepreneurial team in the evaluation criteria?

2. What characteristics do you consider when evaluating an entrepreneurial team?

Evaluation methods

• (3) How would you usually evaluate the entrepreneurial team and their characteristics? What procedures do you typically follow? Can you provide details about these procedures, for example, the role of external stakeholders, documents, and context in which you perform the procedures?

• (4) How much time and effort do these procedures normally take when there is only your firm evaluating a new venture for a first-time investment?

• (5) What are the challenges when performing these procedures?

• (6) Do you have any additional insights regarding your evaluation process?