Venture capital investment selection: an exploratory assessment of the role of entrepreneur personality traits

ABSTRACT

The objective of this study is to investigate which entrepreneur traits are preferred by venture capitalists (VCs) in their investment selection for funds with financial and impact goals. This explorative study draws on the Big-Five framework in management, connects these with VCs’ investment selections and assesses VCs’ biases using newly gathered empirical data from VCs in the Netherlands. Our results reveal that financial and impact VCs portfolios seem to confirm the importance of education and experience and seek distinct entrepreneur personality traits. This study shows that, in addition to considering the traditional hard traits, entrepreneur soft traits influence the selection process and are impacted by a VC fund’s purpose. The findings on the entrepreneur personality traits may help to give substance to the often alluded to “gut feeling” of VCs in investment decisions.

KEYWORDS:

• Venture capital
• investment selection
• entrepreneur traits
• Big Five personality traits

Acknowledgments

The authors acknowledge the NVP Association for their research support, and also acknowledge the students in the Nyenrode research groups PTMSc22 (i.e., Donald Brouwer, Kristian Klein, Gersom Krijnen, Jasper Litjens, Robert Noorman, Bart Roelofs, Jan van der Tempel, and Alexander Vis) and PTMSc23 (i.e., Jir Bischoff, Marijn de Boer, Sam Jansen, Jeroen Leunissen, Rick van Otterdijk, Robin Vogelzang and Sven Weijnschenk) for their helpful data assistance and lively discussions. We also gratefully appreciate the 174 General Partners, who generously provided their time in support of this research project. The authors also acknowledge helpful academic contributions from Kalun Tsé and René Orij on previous versions of this paper and Roland Speklé for his statistical suggestions. Furthermore, to Luisa Alemany (London Business School), Tom Berkhout, John Dumay (Macquarie University), Henk Kievit, Ugo Rigoni (Università Ca’ Foscari di Venezia), Ruud Vergoossen and Peter van der Zwan (Leiden University) for their critical comments. Finally, the authors are grateful for being selected to present at the Entrepreneurial Finance conference in Bath, and the feedback obtained from in particular Peter Wirtz (Université Jean Moulin Lyon 3, discussant) and Armin Schwienbacher (SKEMA Business School, session chair), which helped to address the constructive comments of the anonymous reviewers of this journal and further focus the paper on its key contributions.

Disclosure statement

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

Notes

1. SDG is an abbreviation of Social Development Goals. The abbreviation was introduced by the United Nations in 2015, when it defined 17 goals as part of The 2030 Agenda for Sustainable Development (see sdgs.un.org/goals).

2. ESG framework offers limited direction for investors, while SDG investing provides more “direction and intentionality”, given the SDGs’ standardization and areas of impact, as well as their global indicators, which offer an opportunity for investors to track and compare progress.

3. To contribute to this jockey-horse debate and be able to substantiate assessments with empirical evidence, the Venture Capital Perception research group was formed by Andreoli and Rouwelaar in September 2019. Fifteen students from the Nyenrode Part-time Master’s in Science program (8 students from PTMSc22 and 7 students from PTMSc23) were admitted for participation and were supervised to gather data from VCs and write their individual theses on selected variables.

4. Emotional stability is the antonym of neuroticism (Kerr, Kerr, and Xu 2018a).

5. The larger part (85%) of these questions have Likert-scale answers (ranging from Fully disagree to Fully agree, mostly on a 7-points scale as optimal range in balancing the number of options with the human mind’s ability to reasonably provide nuance in answers (Joshi et al., 2015)), the other are open questions.

6. In line with TSTI, the questionnaire was tested by having three relevant respondents complete the questionnaire and observing their thought process by having them think aloud, verifying observations with the respondents and finally allowing the respondents to add content to the initial questionnaire.

7. Two student research teams (total of 15 students) approached the 438 VCs and for every of the 172 respondents a student was present during completion of the questionnaire (2 were received by mail).

8. Questionnaire is available upon request.

9. The contradictory input pertains to the assessment of performance and importance of non-financial success measures, as result of which the quality of the particular respondents was doubted and consequently these respondents were taken out completely.

10. Despite the association that longer instruments in general may have psychometric properties that exceed the ones of shorter instruments (Burisch, 1997), the application of both abbreviated personality tests (i.e., the FIPI and the TIPI) reveals lower correlations than the more extensive test (e.g., 240-item NEO Personality Inventory or even the 44-item Big-Five Inventory (Benet-Martinez & John, 1998; John & Strivastava, 1999)), as result of which the actual correlations may actually be stronger.

11. Linearity is confirmed using the Box-Tidwell test (tests for the assumption that the relationship between the continuous independent variables and the logit dependent variable is linear). The Box–Tidwell test indicated that all variables except for one were significant at .05 level. Only the independent variable Agreeableness showed that the interaction effect of this variable with its natural log transform was statistically significant (.025), revealing some departure of linearity in the logit. An analysis of polynomials indicated that there was evidence for both a linear and a quadratic component in the relation between the predictor variable Agreeableness and the binary Financial VCP. Further inspection of quantile indicator variables representing Agreeableness revealed that, overall, a negative linear relationship was an adequate description of the association.

12. Four of the 174 respondents were taken out of the sample as result of seemingly incongruent answers (see section 3.3).

13. For robustness purposes, the calculation of the VCP variables based on their factor analysis scores was also considered but proved not to affect the values or regression values.