All three types of Canadian equity investors consider the general characteristics of the entrepreneur(s) as most important when deciding to invest in an early stage technology based company. This is not surprising because previous studies on the decision making criteria of Canadian and US venture capitalists reveal similar results. Studies on the characteristics of BAs in Canada and the US also conclude that these informal financiers invest primarily in the abilities of the entrepreneurial team. In fact, it is the entrepreneurial team that will eventually turn the business opportunity into reality, especially at the early stages in a company. Regardless of how attractive any other factors may be, if the business lacks a well balanced entrepreneurial team, it is unlikely to be successful.

As a group, BAs consider the characteristics of the venture offering (product or service) as next in importance after the entrepreneurs themselves. This is followed by characteristics of the market targeted by the venture. BAs are commonly regarded to be the primary source of financing for early stage companies. At these stages, in a technology based company, it is sometimes difficult to analyze the market being targeted by the venture, as was indicated by many BAs during our interviews with them. Hence, their focus is primarily on the venture offering because the company’s success in capturing a market in the future relies on the successful development of the product or service. Therefore, they must pay a higher degree of attention to characteristics of the venture offering as opposed to the market. As described by one of the BAs: "At the seed stage, all we want to know is that there is an excellent product idea. We feel most comfortable if we create the market."

In contrast to BAs, PVCs as a group tended to consider the characteristics of the market being targeted by the venture as being of greater importance than characteristics of the venture offering. Most PVCs are mandated by their venture capital firm to provide its shareholders with a rate of return on the investment between 25% and 40%. As a result, their primary objective becomes seeking investments in companies which can provide this sort of return. This may explain why PVCs are cautious about the risk to return ratio in the investment opportunity. One of the many ways in which they can evaluate this ratio is by understanding the characteristics of the market, especially the growth rate and size. Whereas BAs are excited by the product or service, PVCs are attracted more by the market being targeted by the venture. One of the PVCs indicated; "The first thing we look for is the market. If its not there, we don’t invest." PVCFs are similar to PVCs in their consideration of the market and venture offering. This may not be surprising since both of them are venture capitalists, a salient difference being the role of shareholders in the corporation for the private venture capital companies.

BAs and PVCs rank investor(s) requirements as more important than characteristics of the investment proposal from the venture. The results described in this study are for the criteria used at the proposal evaluation stage of the decision making process used by investors. The business plan has already successfully passed through the proposal screening phase, and is therefore not as important later on in the process. Instead, they are more concerned about the specifics within the plan. PVCFs show a reversal in importance of these two categories. As crown corporations, their mandate is to foster the economic climate in Canada by investing in companies that otherwise have difficulty in obtaining financing from the traditional sources. Some of the PVCFs invest only in early stage technology based companies. Most PVCFs who conduct the due diligence process use the business plan as their primary tool in evaluating the investment opportunity. Therefore, it is crucial that the document presented by entrepreneurs to this group of investors is well prepared and covers all the aspects required by the PVCFs.

PVCs are attracted to early stage technology based companies which can fulfill the requirements of their venture capital firm. At the time of making an investment, both PVCs and PVCFs consider it key to be able to determine an exit strategy. This is reflected in their response to importance of cash out potential expected by the investor(s) (e.g. going public). PVCs also regard as key that they can determine the anticipated rate of return on the investment and degree of market risk involved with the investment opportunity. BAs are less concerned that they can fulfill their requirements at the time of making an investment. As one BA indicated, "We invest as a hobby and are helping other entrepreneurs. It is very difficult for us to determine things like the expected rate of return, degree of market risk, and cash out potential at the early stages." Another BA opined that: "If we are successful, we invest again. If we lose money in one investment, we get very cautious with the next one, even if it turns out to be a Bill Gates Deal. Its a game. We can’t always sit down and understand the outcome."

This study provides an understanding of the decision making criteria used currently by Canadian equity investors to evaluate technology based companies seeking early stages of financing (seed, start-up or first stages). Three different types of equity investors were studied: Business Angels (BAs), Private Venture Capitalists (PVCs) and Public Venture Capital Funds (PVCFs). Seeking risk capital for early stage technology based companies can be made easier if entrepreneurs have an understanding of what the investors are looking for. This study has provided this understanding and will be of benefit to entrepreneurs seeking risk capital for their technology based companies.



The authors wish to acknowledge support received under the CIBC-Nortel-NSERC/SSHRC Chair in Management of Technological Change.



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