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INTRODUCTION

In recent years, venture capital has played a “catalytic role in the entrepreneurial process” (Bygrave & Timmons, 1992: p. 1). Accordingly, entrepreneurship scholars have devoted much attention to the study of venture capital financing. Venture capital is often critical for young firms with aggressive growth objectives, because such funding often bridges the gap between seed money provided by private investors and the resources for aggressive growth provided by an IPO of stock. In an effort to understand how venture capitalists make investment decisions and to advise entrepreneurs on how best to pitch requests for venture capital, researchers have examined criteria used by venture capitalists to select firms in which to invest (e.g., Timmons & Gumpert, 1982). In addition, because venture capitalists have a reputation for picking and/or creating firms that exhibit unusually high growth and financial returns (Bruno & Tyebjee, 1983), such research can provide a basic understanding of factors associated with survival, growth and performance among all new ventures (Hall & Hofer, 1993).

In previous studies, researchers have used two data collection approaches to examine investment criteria. Some have used interviews or surveys to ask venture capitalists about the criteria they use (e.g., Bruno & Tyebjee, 1985; Hisrich & Jankowicz, 1990, MacMillan, Siegel & SubbaNarasimha, 1985; MacMillan, Zemann & SubbaNarasimha, 1987; Tyebjee & Bruno, 1984). Others have used observational techniques, such as computerized simulations of decision making (e.g., Rosman & O'Neill, 1993) or protocol analysis of transcripts produced by asking venture capitalists to make decisions while "thinking out loud" (e.g., Hall & Hofer, 1993). Depending on the technique used, findings have been somewhat contradictory. The majority of studies using survey methods have consistently found that managers' backgrounds and abilities were overwhelmingly important, while strategy, industry and financial characteristics were relatively unimportant. Observational methods have found that, while management characteristics are important, strategy, industry, and financial characteristics are far more important. Thus, entrepreneurs and scholars are left to wonder whether venture capitalists "practice what they preach." Consequently, when preparing business plans for review by venture capitalists, entrepreneurs may be uncertain about whether to stress factors venture capitalists have said are important or factors researchers have observed to be important. Because detailed reviews already appear in the literature (Fried & Hisrich, 1988; Hall & Hofer, 1993; Sandberg, Schweiger & Hofer, 1988), only highlights of prior studies will be presented below.

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