SCREENING PHASE REJECTIONS OF 
VENTURE CAPITAL SEEKERS 
IN SOUTH AFRICA 
G.C. VAN EEDEN Hons B.A. 
Minidissertation submitted in partial fulfilment of the 
requirements for the degree MBA at the North-West University. 
Dr. A. Smit 
Acknowledgements 
I wish to express my gratitude to the following persons: 
My late father, Gerald van Eeden, who taught me what integrity in business is all 
about. 
My mother, Villierie van Eeden, who supported me during my studies. 
My wife, Anesta, for her support and for proofreading this manuscript. 
Dr. Anet Smit for her guidance. 
My Creator for giving me the ability and opportunity to study and for blessing me at 
all times (Ps. 127:2). 
Summary and key terms 
A lack of capital is one of the factors that inhibit business development in the developing 
world, including South Africa. This is especially true for a prospective business where the 
owner does not have security to secure a bank loan. 
A financing option that is available to entrepreneurs is venture capital. However, venture 
capitalists reject 88 percent of all new applications for venture capital in the initial 
screening phase. This study examined the reasons for the high rejection rate of 
applications for venture capital in South Africa. Non-compliance with the internal fund 
preferences of venture capitalist firms was identified as one of the biggest reasons for the 
rejection of applications for venture capital. 
Other factors were also investigated with specific reference to the Timmons Model of the 
entrepreneurial process. It was determined that factors relating to team, opportunity, and 
resources are also important in the initial screening phase, but they are not as important 
as internal fund preferences. 
Uniquely South African factors were also investigated and it was determined that factors 
relating to black economic empowerment and corporate citizenship play a relatively 
unimportant role in the approval of new ventures by venture capitalists. 
Based on the above-mentioned study, a Framework for venture capital seekers was 
developed. This framework is aimed at increasing the probability of applications for 
venture capital passing the initial screening phase. 
Opsomming en sleutelterme 
'n Gebrek aan kapitaal is een van die faktore wat 'n inhiberende uitwerking op 
besigheidsontwikkeling in die ontwikkelende wereld, insluitend Suid-Afrika, het. Dit geld 
veral ten opsigte van voornemende besighede waar die eienaars nie die nodige sekuriteit 
het om 'n banklening te bekom nie. 
'n Vorm van finansiering wat tot entrepreneurs se beskikking is, is waagkapitaal. 
Verskaffers van waagkapitaal keur 88 persent van alle nuwe aansoeke om waagkapitaal 
af gedurende die aanvanklike keuringsfase. Die redes vir die hoe persentasie aansoeke 
wat in Suid-Afrika afgekeur word, is in hierdie studie ondersoek. Een van die vernaamste 
faktore wat daartoe bydra dat aansoeke om waagkapitaal tydens die keuringsfase 
afgekeur word, is gei'dentifiseer: dit is bevind dat voorgestelde ondernemings nie aan die 
interne fondsvoorkeure van waagkapitaalfirrnas voldoen nie. 
Ander faktore is ook ondersoek met spesifieke verwysing na die Timmons-model van die 
entrepreneursproses. Dit is bevind dat faktore met betrekking tot span, geleentheid en 
hulpbronne ook 'n belangrike rol tydens die keuringsfase speel, alhoewel dit nie so 
belangrik soos interne fondsvoorkeure is nie. 
Faktore wat uniek is aan die Suid-Afrikaanse konteks is ook ondersoek. So is bevind dat 
faktore wat verband hou met swart bemagtiging en korporatiewe burgerskap 'n relatief 
klein rol in die goedkeuring van nuwe ondernemings deur waagkapitaliste speel. 
'n Raamwerk vir Waagkapitaalsoekers is op grond van die genoemde studie opgestel. 
Hierdie raamwerk is daarop gemik om die kanse te verhoog dat 'n aansoek om 
waagkapitaal die aanvanklike keuringsfase slaag. 
i 
Table of contents 
... List of figures ................................................................................................................... Ill 
List of tables .................................................................................................................... iv 
Chapter I 
Introduction ..................................................................................................................... 1 
.............................................................................. 1.1 Background to the study I 
1.2 Reason for the study ............................................................................... 2 
1.3 Problem statement ...................................................................................... 3 
1.4 ................................................................................ Objectives of the study 3 
1.5 Research methodology ................................................................................ 3 
1.6 Boundaries of the study ............................................................................... 4 
1.7 Breakdown of the study ............................................................................... 4 
Chapter 2 
Venture capital: theoretical concepts ............................................................................ 5 
2.1 Introduction .................................................................................................. 5 
2.2 Venture capital defined ................................................................................ 5 
2.3 Venture capital vs . debt ............................................................................... 7 
2.4 The 'typical' venture capitalist .................................................................... 8 
..................................................................... 2.5 Venture capitalists and angels 9 
.......................................................... 2.6 Capital sources of venture capitalists 9 
2.7 Financial cycles and venture capital ....................................................... 10 
2.8 Classification of venture capitalist firms in South Africa ............................. 13 
2.9 The venture capital process ....................................................................... 14 
2.10 The venture capitalist decision-making process ........................................ 17 
2.1 1 The venture capital screening phase ......................................................... 18 
Chapter 3 
Venture capital screening: critical factors ...................................................................... 21 
3.1 Introduction ................................................................................................ 21 
3.2 Internal fund preferences ........................................................................... 21 
3.3 Venture analysis ........................................................................................ 22 
3.3.1 Predicting venture success ........................................................................ 22 
3.3.2 Venture capital screening criteria .............................................................. 24 
3.4 Summary ................................................................................................... 25 
3.5 The Timmons Model ................................................................................. 25 
3.5.1 Resources ................................................................................................. 27 
3.5.2 The team ................................................................................................... 27 
3.5.3 The opportunity .......................................................................................... 27 
3.5.4 Summary ................................................................................................... 29 
3.6 Corporate citizenship, legislation and venture capital screening ............... 29 
3.6.1 The role of government in the economy ................................................... 29 
3.6.2 Corporate citizenship ................................................................................. 30 
3.6.3 Black Economic Empowerment (BEE) ....................................................... 31 
3.6.4 Conclusion ................................................................................................. 32 
3.7 Summary of critical factors regarding screening phase ............................. 32 
Chapter 4 
Empirical study of venture capitalist 
companies in South Africa ............................................................................................ 35 
4.1 Introduction ................................................................................................ 35 
4.2 Sample selection ....................................................................................... 35 
........................................................................................... 4.3 Data collection 36 
4.4 ............................................................................................ Questionnaire 36 
4.5 The questions ............................................................................................. 37 
Chapter 5 
Survev results ............................................................................................................... 40 
Introduction ................................................................................................ 40 
Research sample ................................................................................ 40 
.......................................................................................... Factor analysis 41 
General ............................................................................................... 41 
Reasons for rejections ............................................................................... 41 
ROI over five years .................................................................................... 42 
Internal fund preferences ........................................................................... 43 
. ............................................................................. Venture analysis team 44 
. ..................................................................... Venture analysis resources 45 
Venture analysis . opportunity .................................................................. 45 
. . Corporate c~t~zenship ................................................................................. 46 
Summary of results .................................................................................... 47 
Framework for venture capital seekers ...................................................... 48 
Closina ....................................................................................................... 49 
. 
................................................................................................................. Bibliography 51 
Appendix A 
Evaluation factors used in different studies .............................................................. 55 
Appendix B 
Statistically processed survey results ............................................................................ 56 
iii 
List of figures 
Figure 2-1 Venture financing ........................................................................................ 11 
Figure 2-2 Financing life .......................................................................................... 12 
Figure 2-3 The venture capital process ......................................................................... 15 
Figure 2-4 Professional venture investing .................................................................... 16 
Figure 3-1 The Timmons Model of the Entrepreneurial Process ................................... 26 
Figure 3-2 Categorizing elements of citizenship .......................................................... 30 
Figure A-I Evaluation factors used in different studies ................................................ 55 
iv 
List of tables 
. Table 2-1 Venture capital vs . debt ................................................................................ 7 
Table 2-2 Financial cycle investment stage preferences by South African VC 
companies ..................................................................................................................... 13 
Table 2-3 Stages of venture capitalist investment cycle ............................................... 18 
Table 3-1 Characteristics of successful ventures and relevant predictors of success ... 23 
Table 3-2 VC screening criteria by Hall and Hofer ........................................................ 24 
Table 3-3 Criteria for evaluating venture opportunities .................................................. 28 
Table 3-4 Formal precedents for good citizenship ........................................................ 31 
Table 4-1 Questions to be asked to venture capitalists in South Africa ........................ 37 
Table 5-1 Internal fund preferences factors .............................................................. 44 
Table 5-2 Venture analysis . resources factors ............................................................ 45 
Table 5-3 Venture analysis . opportunity factors .......................................................... 45 
Table 5-4 Corporate citizenship factors ........................................ , . , . , . , . , . 46 
Table 5-5 Summary of results ....................................................................................... 47 
Chapter 1 
Introduction 
1 .I Background to the study 
South Africa is a country of extreme contrasts. The contrast between wealth and poverty is 
evident in our landscape. Sandton and Alexandra, for example, which lie adjacent to each 
other, are a testimony to the gap between economic prosperity and poverty. Following the 
recent political liberation in South Africa, one might assume that there is a very bright 
future ahead for everyone. However, the reality is that South Africa faces many problems, 
specifically poverty and crime. To add to South Africa's woes there is also a large skills 
shortage. 
Given South Africa's many problems, the question can rightly be asked whether the 
country can become a winning nation. This is also the question foremost in the minds of 
many development studies scholars. Many people believe that some negative trends can, 
indeed, be reversed. In terms of the unemployment situation, the current government have 
introduced many initiatives to solve the problem. They have instated various Sector 
Education and Training Authorities (SETAs) to address the skills shortage in different 
industries. The South African government has also pledged to create one million jobs in 
the next five years (Manning, 2004). 
Job creation is closely linked with small and medium enterprises (SMEs). Some scholars 
believe that SMEs are the engine of an economy and that they provide the primary 
impetus for economic growth. One of the results of economic growth is job creation. Given 
the South African government's focus on job creation, SMEs should get their support. But 
SMEs face many obstacles in South Africa. Firstly, the government has imposed strict 
regulations on SMEs. Secondly, SMEs get limited support from the government. Thirdly, 
SMEs are generally cash-strapped and do not have access to capital. According to De 
Soto (2000:5), limited access to capital is why the Third World is economically 
underdeveloped and the First World is economically advanced. In a study conducted on a 
number of third world countries, financial support was stated by experts as one of the three 
national weaknesses in Brazil, India, Mexico, and South Africa. In South Africa, this factor 
was listed second after education and training (the most mentioned factor) (Orford, et a/. 
2003: 17). 
In a study conducted by Pretorius and Shaw (2004:239) they concluded that when 
business owners apply for bank loans in South Africa, the creditworthiness of an applicant 
is the primary criterion in terms of which an application is considered. Even if an 
entrepreneur has a good business idea, his chances of obtaining debt capital are very 
slim. Fortunately, there are other sources of business capital. One of them is venture 
capital. This study will focus on the key factors that contribute to successful applications 
for venture capital, with specific reference to SMEs. 
1.2 Reason for the study 
In a preliminary investigation of the venture capital industry the following trend was 
observed: Venture capitalists are very selective in choosing venture opportunities and 
reject most of the investment opportunities that are proposed to them. It is estimated that 
only between two and four percent of all entrepreneurs who contact venture capitalist firms 
receive financing from them. (Timmons & Spinelli, 2003:480). The question can rightly be 
asked whether 96 percent of all business opportunities proposed to venture capitalists is 
unsound. When the venture capital process is investigated further, it becomes evident that 
most of these rejections occur in the screening phase. Given the fact that venture 
capitalists publish their minimum investment criteria on their websites, it is unclear why the 
rejection rate is so high. Is it the result of poor communication by venture capitalists 
(insufficient information on their websites), or do entrepreneurs fail to comply with the 
criteria that venture capitalists lay down? There are various other possibilities, one of 
which is that venture capitalists are not completely open and forthright about their 
requirements. Another possibility is that venture capitalists are not sure about their own 
investment requirements. Studies indicate that venture capitalists are, indeed, unreliable 
when they are asked about their selection criteria. In fact, venture capitalists tend to 
overstate unimportant factors and understate more important criteria (Shepard, 1997:8). 
In light of this, the selection criteria of venture capitalists require further study. An attempt 
will be made through this research to identify the key factors that ensure success for 
venture capital seekers in the venture capital process. 
1.3 Problem statement 
With reference to the initial venture capital screening process, the following statements 
can be made: 
. On the one hand, venture capitalist seekers are not knowledgeable about the key 
factors that play a role in the procurement of venture capital and, on the other hand, 
venture capitalists do not communicate these key factors to venture capitalist seekers. 
. There is a great deal of uncertainty about the screening phase in the venture capital 
process. 
1.4 Objectives of the study 
The main objective of this study is to identify the critical factors that play a role in the 
screening phase of the venture capital process. This endeavour will make a significant 
contribution to the venture capital process by providing clarity for both venture capital 
seekers and venture capitalists. 
The second objective of this study is to gain an understanding of the reasons for the high 
rejection rate of applications for venture capital in the initial screening phase. 
The third objective of this study is to identify what information venture capitalists should 
publish to discourage non-qualfying venture capital seekers from applying. If the 
screening process is communicated upfront much time will be saved in the screening 
process. The venture capitalist will have more time to analyse good opportunities and the 
entrepreneur will be guided to create better business proposals. 
1.5 Research methodology 
To achieve the above-mentioned objectives, the following research methodology will be 
followed: 
A literature study will be conducted on venture capital and various aspects relating to it. 
The purpose of this study is not to create a complete overview of all aspects of venture 
capital; rather, it is an attempt to highlight important aspects and issues regarding venture 
capital and the venture capital process. Once a basic understanding has been achieved of 
the issues surrounding the industry, it will be possible to focus on specific issues. After this 
general overview, the focus of the study will shift towards critical factors in the venture 
capital screening process. An attempt will be made to identify and categorize critical 
factors. 
After the critical factors have been identified, a field study will be conducted among 
venture capital companies in South Africa. A questionnaire will be distributed to study the 
relative importance of each factor identified in the preceding study. The responses 
obtained in the questionnaire will be captured in a databaselspreadsheet. Thereafter 
conclusions will be drawn from these responses in order to identify the critical success 
factors in the initial screening phase of the venture capital process. 
1.6 Boundaries of the study 
This study will be limited to SMEs in South Africa that seek venture capital. Therefore, only 
those venture capitalists who offer a minimum investment amount of less than R10 million 
will be studied. The empirical study will be limited to full members of the South African 
Venture Capital and Private Equity Association. The study will also focus on the initial 
screening process in the venture capital process. 
1.7 Breakdown of the study 
Chapter 2: Venture capital: theoretical concepts 
Chapter 3: Venture capital screening: critical factors 
Chapter 4: Empirical study of venture capitalist 
companies in South Africa 
Chapter 5: Survey results 
Chapter 2 
Venture capital: theoretical concepts 
2.1 Introduction 
In the world of venture capital, the name that is mentioned time and again is John Doerr. 
John Doerr is to the venture capitalist industry what Warren Buffet is to the stock investor 
industry. Both have an extraordinary ability to choose winners. John Doerr made an 
investment of $12,5 million for a stake in Google in 1999. When Google goes public later 
in 2004, it is expected to reach more than $3 billion. With one deal John Doerr has earned 
a return 240 times the original investment for his firm Kleiner Perkins Caufield & Byers. 
This represents a return of 2 400 percent in five years. 
Other successes that John Doerr have secured for his firm were an $8 million investment 
in Amazon Books that turned into $60 million, and a $5 million investment in Netscape 
Communicator that reaped $400 million. "John Doerr throws big darts at distant targets. 
Most miss, but when they hit, it's spectacular," says Jerry Kaplan, a Silicon Valley 
entrepreneur whose start-ups in the early 1990s. Go Corporation and Onsale.com, were 
flops backed by Kleiner through Mr Doerr. (Rich, 2004). From this example the venture 
capital industry in the United States can be described as vibrant and potentially very 
rewarding for a venture capitalist. 
Venture capital will now be examined from a theoretical perspective. The best place to 
start this examination is to explore the various definitions of venture capital. 
2.2 Venture capital defined 
There are numerous definitions of venture capital. 
Definition 1: According to the ECED (2001:1605), venture capital is money used for 
investment in projects that involve a high risk, but offer the possibility of large profits. 
Definition 2: Venture capital is money provided by professionals who invest alongside 
management in young, rapidly growing companies that have the potential to develop into 
significant economic contributors. Venture capital is an important source of equity for start- 
up companies (National Venture Capital Association, 2004). 
Definition 3: Money used to support new or unusual commercial undertakings; equity, risk 
or speculative capital. This funding is provided to new or existing firms that exhibit above- 
average growth rates, a significant potential for market expansion and the need for 
additional financing for business maintenance or expansion (The Online Financial 
Dictionary for Investors, 2004). 
Definition 4: A fund-raising technique for companies who are willing to exchange equity in 
the company in return for money to grow or expand the business. Venture capital firms 
often want a high rate of return (20%+) and will finance the business with $500,000 to 
millions. A venture capitalist differs from an angel investor in terms of wanting greater 
control of company and quicker return on investment (About.Com, 2004). 
The following elements of the above definitions are important: 
There is an exchange of equity. The venture capitalist buys a portion of the 
entrepreneur's business. The venture capitalist becomes a co-business owner along 
with the entrepreneur. If the business fails, the venture capitalist loses his money, but 
he has no claim against the entrepreneur. If the business is successful the venture 
capitalist shares in the spoils of the business. 
. There is an exchange of money. There is a capital injection in the venture that is 
funded. This implies that the venture will have more money available to assist in its 
development. 
There is a high-potential opportunity. The venture that is financed is typically a high- 
potential opportunity. This implies that if the venture is successful it will have big returns. 
7 
. There is an element of risk. The ECED (2001:1605) defines "venture" as a risky 
project; a new business enterprise; and money risked. The venture capitalist takes the 
risk to lose his money in return for higher potential gains. The entrepreneur's risk is 
lowered, because a capital injection in the business will increase the odds of survival of 
the firm. The capital is risk free to the entrepreneur, because it will not have to be paid 
back if something goes wrong, as is the case with debt. 
2.3 Venture capital vs. debt 
The main differences between debt and equity are summarized in 
Table 2-1. 
Table 2-1 
Venture capital vs. debt 
Nhat if the business - 
3arely survives? 
s very successful? 
The bank will still get its The VC will not be satisfied 
money back and the bank with its investment. 
manager will be happy. 
The bank will only get back The VC will be entitled to a 
the borrowed amount plus portion of the business and 
interest. will realize a high return on 
his investment. 
The bank will stand first in 
the line together with other 
creditors and should get 
back a portion of the loan. 
1 The VC can choose to sell 
his stake in the business or 
continue his ownership in the 
business and share in its 
profits. 
The VC will stand last in the 
queue and will only get 
money after all the debtors 
have been paid. 
From the above table the following conclusions can be drawn: Whilst a venture capitalist is 
highly involved with the future growth prospects of a business the same cannot be said 
about banks. Banks have nothing to gain if a venture is highly successful. The findings of 
Pretorius and Shaw (2004:237) on the role of business plans in bank decision making, 
confirm this - they conclude that banks sometimes even finance poor potential ventures if 
they are supported by credit guarantees. The entrepreneur might lose everything, but the 
bank will get its money back, because it did not take any risks. 
In another study it was confirmed that banks place a high premium on security in the 
granting of finance and that this is not only a South African phenomenon. Manove et a/. 
(2001:728) state that in the United States, approximately 40 percent of small business 
loans and almost 60 percent of their value are guaranteed andlor secured with personal 
assets. There is a general complaint that banks do too little screening and tend to rely 
excessively on collateral. One of the only financing avenues that might be open to the 
entrepreneur without security is a venture capitalist firm. The classification of venture 
capitalists will be discussed next. 
2.4 The 'typical' venture capitalist 
Venture capitalists are very diverse and cannot be classified according to the business 
type they finance, the amount of money they invest, or the life cycle of a business they 
prefer to finance. This will be discussed below. 
Venture capitalists cannot be classified according to the business type that they choose to 
finance. Some venture capitalists specialize in certain businesses, whilst others stay away 
from those businesses owing to moral reasons. Aquila Growth Ltd, for example, favours 
gambling ventures, whilst gambling is specifically excluded from the portfolio of Kagiso 
Enterprises. 
Venture capitalists cannot be classified in terms of the amount of money that they invest. 
Some invest a maximum of RlOO million, whilst others are only prepared to invest a 
maximum of R1 million. The minimum investment ranges between RlOO 000 and R30 
million. 
Venture capitalists cannot be classified according to the life cycle of the business they 
choose to finance. Some venture capitalists prefer to finance start-up ventures and other 
exclude start-ups from their portfolio (SA Waagkapitaalen Privaataandeelvereniging 2004 
Jaarboek (SAWVJ). 2004:20-23). 
Although venture capitalists are a very diverse group, a number of common factors set 
them apart from other finance providers. Referring back to the definitions of venture capital 
discussed earlier, venture capitalists purchase equity in businesses in an attempt to gain 
above-average returns. In order to gain a better understanding of venture capitalists the 
differences between them and angels will be investigated. 
2.5 Venture capitalists and angels 
Angels are wealthy investors who mostly provide start-up capital for businesses. Although 
angels are classified as wealthy, their capital investments do not match the capital 
resources of venture capitalists. Venture capitalists obtain the money they invest from 
various investors. This is also one of the main reasons why angels are mainly involved in 
start-up businesses and venture capitalists are involved in later round financing. 
One might assume that there is a good relationship between angels and venture capitalists 
in view of their codependency. Sources indicate that it is actually the other way around. 
Some venture capitalists would not come near ventures where angels are involved (Stein, 
2004:28) (Ravi, 2004:29-30). Venture capitalists view angels as unsophisticated, because 
angels sometimes impose exorbitant terms and conditions on entrepreneurs. Some of 
these are non-dilution clauses that inhibit further financing rounds (Bushrod, 2003:47-52). 
The capital sources of venture capitalists will be investigated further. 
2.6 Capital sources of venture capitalists 
From the preceding discussion two important points must be stressed: Venture capitalists 
use money obtained from various sources and have large amounts to invest. This can be 
seen from the minimum amount invested in ventures. In South Africa, the minimum 
amount ranges from RlOO 000 to R30 million. A venture capitalist typically gets investors 
to invest in a fund. Once this fund is strong enough, the fund managers will start to invest 
in big opportunities. Hence the definition of venture capitalists as individuals who join 
together in formal, organized firms to provide equity funds to high-risk, high-potential- 
return ventures (Leach & Melicher, 2003:25). This type of investment is called independent 
funds (SAWVJ, 20041 1). 
There is another source of capital for venture capitalist companies. Some investment 
companies use their own balance sheet or the balance sheet of their holding company to 
invest in ventures. This type of investment is called private equity funds. 
The financial cycles in venture capital will be investigated further. 
2.7 Financial cycles and venture capital 
Theory suggests that there are many financing rounds in the lifetime of a business. The 
participants of each round try to maximize its terms to their advantage and to protect their 
investment from unfavourable conditions in future rounds. This is one of the major areas of 
conflict between angels and venture capitalists (as discussed earlier). Kotelnikov (2004) 
suggests that venture capitalists generally get involved in the roll-out phase of a business 
(Figure 2-1). 
11
Figure 2-1
Venture financing chain
Kotelnikov(2004)
Accordingto theSA\fNJ (2004:11),equityinvestmentis onlyclassifiedas venturecapital
if itis seedcapitalor if it is investedintheearlystagesof thebusinesscycle.Development
capital(usedfor the expansionof an existingbusiness)and buy-outcapital(used by
managementtobuyintoa business)arenotclassifiedasventurecapital.
Figure2-2 givesa detailedoverviewof thefinancialcycleof a businessandthetypical
financingusedineachstageofthedevelopmentofa business.
Figure 2-2 
Financing life cycles 
Rennues (S Millions) 
quny and Risk Capltal 
Equity Capital: 
Personal savings1 
Friends 8 Family 
informal investors 
Venture capital: 
Corporation and 
partnership 
SBICs, MESBlCs 
Strategic alhnces and 
partnetships 
Risk capital: 
Private placements 
Menaninemridge capital 
ESOP6 
Public equity markets 
Timmons & Spinelli (2003:453) 
R8D Start-up Early gmwth Rapd grov& Exit (LBOs. MBOY 
Under l250,WO 
$1 million and up 
1 C 
5350,WO and up 
1 C 
0250,WO and up 
* C 
S350,WO to $5 million 
4 + 
$1 millimn to $15 million 
$1 million and up 
* C 
$5 million and up 
* * 
Venture capital is generally only an option for a company from more or less the start-up 
stage until year five of the rapid growth phase. After year five of the rapid growth phase, 
the company must search for other financing avenues like private placements, bridge 
capital, employment stock ownership plans (ESOPs) or listing on public equity markets. If 
a company is still in the research and development stage of development, venture capital 
is not an option and the entrepreneur must seek other options of financing. 
Another aspect that must be noted regarding the financing cycle is that a firm might need 
the same kind of financing more than once during its move towards maturity. For this 
reason financing rounds are usually numbered incrementally. 
2.8 Classification of venture capitalist firms in South Africa 
Of the members of the South African Venture Capital and Private Equity Association listed 
in the S A W J  (2004:20-45), only full members that invested R10 million or less were 
investigated. Each company was measured against its financial cycle investment stage 
preferences. On the basis of this, each firm was examined to determine whether or not it 
can be classified as a venture capitalist firm. 
Table 2-2 
Financial cycle investment stage preferences by South African VC companies 
I 
Agil Venture Capital (Pty) Ltd I Early phase investments I Yes 
Aureos Capital Late stage investments ? 
Brait Private Equity Late stage investments ? 
Business Partners Ltd All Yes 
Cycad Financial Holdings Ltd All Yes 
Enterprise Equity Partners (Pty) Ltd Early Yes 
Equity Africa Trust Early I expansion Yes 
Export Venture Capital Corporation (Pty) Nla - 
Ltd 
HBD Venture Capital Start-up and early stage Yes 
investments 
Horizon Equity Partners All, except start-up Yes 
i capital Fund Managers Ail, except sow capital, start-up Yes 
Industrial Development Corporation of SA Nla - 
Limited 
International Finance Corporations Nla - 
lnvestec Usually start-up or sow capital Yes 
Kagiso Enterprises All, except start-up Yes 
Khula Equity Fund 
Lireas Holdings (Pty) Ltd 
MCI Fund Managers (Pty) Ltd 
National Empowerment Fund 
Nedbank Corporate Private Equity 
NewFarmers Development Company Ltd 
NIB-MDM Fund Managers (Pty) Ltd 
- ~ ~ ~ - -~ ~ - -  
Own from SAWFJ (2004:20-45) 
From the above the following is important: Most of the companies investigated finance at 
least one financial stage that is usually financed by venture capitalists. Therefore, they can 
be classified as VC firms. In the case of Aureos Capital and Brait Private Equity, it is only 
stated that they favour later stage investments. The context and exact meaning of this 
term cannot be determined and both companies will be disregarded from this study. The 
same will be done regarding companies whose preferences are unknown. 
All 
Start-up 
All, except start-up 
All, except sow capital 
All, except start-up 
All 
All, except sow and start-up 
Yes 
- 
Yes 
Yes 
- 
Yes 
I Sabvest Ltd 
Southern Africa Enterprise Development 
Fund 
Triumph Venture Capital (Pty) Ltd 
Vantage Capital Fund Managers (Pty) Ltd 
Wipprivate Equity (Pty) Ltd 
2.9 The venture capital process 
As seen from the above-stated definitions, venture capitalists buy stakes in promising 
businesses. However, there is much more to the 'job description' of a venture capitalist. A 
venture capitalist must - 
find money to invest; 
find ventures to invest in; 
Yes 
Yes 
Yes 
Yes 
Yes 
Yes 
Yes 
I 
All, except start-up 
Nla 
All, with a preference for eariy 
stage investments 
All 
All, except start-up and growth 
analyse ventures to determine the risk profile of each venture; 
identify the best possible investment; and 
realize a return on investment for his investors. 
Figure 2-3 is a graphical representation of the above process. 
Figure 2-3 
The venture capital process 
VCs Venture 
(Provides money (Search Ventures, 
analise ventures, 
choose & invest) value) 
ROI 
(If venture is 
successful) 
Own figure 
ROI 
(If venture is 
successful) 
Every element in the above process is important. Should any element be lacking the 
venture will not be successful. If, for example, the VC constantly fails to choose successful 
ventures it will not obtain funding from investors. The decision-making process is. 
therefore, of critical importance to the venture capitalist. 
Another way of looking at the VC process is to investigate the Professional Venture 
Investing Cycle as illustrated in Figure 2-4. 
I Professional venture investing cycle 
(Leach (L Melicher, 2003:25) 
In Figure 2-4 the venture capital process is depicted as a continuous cycle of the following 
steps; 
1. Determining fund objectives and policies. 
2. Organizing the new fund (usually a partnership). 
3. Soliciting investments in the new fund. 
4. Obtaining commitments for a series of capital calls. 
5. Conducting due diligence and investing actively. 
6. Arranging harvest or liquidation. 
7. Distributing cash and securities proceeds if available. 
The rest of this study will focus on step 5 of the above list, that is, the conducting of due 
diligence. Due diligence will be narrowed down and the focus will be on the screening 
phase of the decision-making process. 
2.10 The venture capitalist decision-making process 
Venture capitalists will say that they make rational decisions based on certain criteria and 
standards that are taken into consideration. However, when the decision-making process 
is researched, various loopholes are exposed in the 'rational' decision-making processes 
of venture capitalists. There are indications that venture capitalists are unreliable when 
they are questioned on their decision-making processes. Their actual decision-making 
process has been found to differ significantly from their believed decision-making process 
(Zacharakis, I99Wl ) .  
Closely related to the above is the role of subjective evaluation when analysing business 
opportunities. One venture capitalist compares the portfolio management process with art 
appreciation: "You look at a lot of art, some is good, some is OK and some is bad. At some 
point, after seeing enough art, something inside clicks and you start to appreciate why 
certain art is good and more importantly why certain art is bad." (Waldeck, 2003:6.) 
One important aspect of the VC decision-making process is that it consists of different 
stages. Authors differ on the exact steps in the decision-making cycle, but most agree that 
it involves a screening stage. 
Table 2-3 is a representation of the stages in the venture capital investment cycle. 
Table 2-3 
Stages of venture capitalist investment cycle 
investments 
Birrer (2002:6) 
It takes between four and eight steps before money is paid out to an entrepreneur. All 
authors agree that there is a screening phase. The screening phase will be investigated 
further. 
2.1 1 
A detaile 
The venture capital screening phase 
d analysis of a venture does not take place in the screening phase. Screening 
rather a generic evaluation based on a checklist. If a venture passes the first phase 
is 
it 
warrants further investigation. According to Wu (2001:1), a managing director in Alameda 
Capital, a VC firm, the process works as follows: "Since a VC has to process a very large 
number of new prospects, sometimes thousands each year, his highest priority is his own 
time management. This means that his work is mostly focused on eliminating 99% to 
99.8% of the opportunities he is presented. As quickly as he can. The game becomes one 
of looking for reasons NOT to invest. Due diligence proceeds only when a VC feels 
strongly that an investment might make sense, so is usually a late step in the process." 
Wu's estimation of 99 percent might be overstated for with respect to VC industry. 
According to an estimate from Singapore, one in 20 proposals will pass the initial 
screening (Koh & Koh, 2002:6). In another estimate, 80 percent of all venture capital 
applications are rejected in the initial screening process in the USA (Paap, 1992:2). The 
bottom line is that a high percentage of business proposals are only screened and are 
rejected on the basis of that screening. 
When one investigates venture capitalists in South Africa, it is evident that every VC 
company has minimum requirements for investment. Almost all of them lay down fixed 
criteria for their target investments. These criteria include minimum investment size, 
maximum investment size, industry preference, industry exclusions, economic cycle of 
business, and geographic preference. These criteria are usually published on a VC firm's 
website to discourage VC seekers to apply for funds for which they do not qualify. HBD 
Venture Capital, for example, has published the following information on its website. "How 
to Apply - Got a concept or start-up business that requires funding? Firstly, you need to - 
a) determine if you qualify; 
b) if you do, the next step would be to apply." (http:llwww.hbdvc.com) 
Detailed information on the investment criteria of HBD Venture Capital is available on this 
website. Similar information can be obtained from the other VC companies in South Africa. 
It appears that venture capitalists publish all their minimum criteria for investment. In light 
of this, the question can be asked why there is still such a high rejection rate in the 
screening phase. There are various possible answers to this question. A few of the most 
obvious answers are the following: 
a) Venture capitalist seekers do not familiarize themselves with the basic criteria. 
b) Venture capitalist seekers (as most entrepreneurs) ignore the criteria and believe that 
their idea is so good that it will be funded. 
c) Venture capitalist firms do not publish all the information regarding the initial screening 
process and their selection criteria. 
d) Venture capitalist firms are not sure about their own investment criteria. 
Consequently, the venture capital screening criteria require further examination. This will 
be done in the next chapter. 
Chapter 3 
Venture capital screening: critical factors 
3.1 Introduction 
As indicated in the previous chapter, the screening of ventures is the phase where most 
business proposals are rejected. Studies indicate that the average venture capitalist firm 
spends 10 to 15 minutes on the initial screening phase. One study indicates that as little as 
six minutes is spent on screening a business proposal (Mason & Stark, 2002:8). In an 
extreme example, Wu (2001:l) puts the attention span of a venture capitalist at two 
minutes. 
These findings suggest the following: The basic screening criteria used by a venture 
capitalist are not overly complicated, because little time is spent evaluating ventures. The 
criteria that venture capitalists use in order to identify critical factors used in the screening 
process will be investigated next from the following perspectives: 
Internal fund preferences 
Venture analysis 
The South African context 
3.2 Internal fund preferences 
Research indicates that one of the main reasons why venture capitalists reject proposals 
in the initial screening phase is that proposals do not fit investors' internal fund preferences 
(Mason & Stark, 2002:7). As discussed earlier, venture capitalists can be differentiated 
from each other in terms of internal fund preferences. Venture capitalists usually have 
preferences with respect to the following: 
Minimum investment amount 
Maximum investment amount 
Industry preferences 
Industry exclusion preferences 
22 
Investment stage 
Minimum and maximum percentage equity taken up 
Geographic preference 
Various other factors can be included in internal fund preferences. Leach and Melicher 
(2003:ll) also include the following: Cash-out potential; familiarity with technology, 
product, and market; financial provisions for investors; investor control; rate of return; and 
risk. 
The internal fund preferences are of vital importance. The empirical study will measure 
how tolerant investors are in the initial screening phase towards ventures that fall outside 
the scope of the internal fund preferences. But there is much more to the screening phase 
than internal fund preferences. Factors that fall outside the internal fund preferences will 
be examined next. 
3.3 Venture analysis 
As stated earlier, successful venture analysis is crucial to the success of a venture 
capitalist firm. Venture capitalists cannot use the traditional methods that banks use. 
Banks have no interest in the success of a venture, whilst venture capitalists are very 
interested in this aspect and only invest in the best opportunities. Venture capitalists are 
like diamond miners and will go through tons of rock to find a diamond. For this reason, 
venture capitalists cannot use the bankruptcy prediction models that banks sometimes 
use. 
3.3.1 Predicting venture success 
This following question is at the core of venture analysis: How can it be predicted that a 
given venture will be very successful? 
MacMillan et a/. (1995:126) concluded in a study of 150 ventures that there are only two 
necessary and sufficient predictors of venture success. They are - 
23 
the extent to which a venture is initially isolated from competition; and 
the degree to which there is a demonstrated market acceptance of the product. 
In the study, all other factors were disregarded as unreliable predictors. 
This finding is in stark contrast with the views of John Doer who believes that the team is 
one of the best predicting factors of venture success. Doer states: "In the world today, 
there's plenty of technology, plenty of entrepreneurs, plenty of money, plenty of venture 
capital. What's in short supply is great teams. Your biggest challenge will be building a 
great team .... But to take full advantage of those opportunities, focus on the team. Teams 
win." (Malone: 1997) 
Other authors believe that success can be predicted by taking a combination of factors into 
account. Table 3-1 presents a number of predictors of success. 
Table 3-1 
Characteristics of successful ventures and relevant predictors of success 
Entrepreneurial team characteristics 
Product/se~ice characteristics 
Market characteristics 
Capacity for sustained effort 
Evaluates and reacts to risk well 
Articulate when discussing venture 
Attention to detail 
Personal compatibility with me 
Familiarity with the market 
Leadership abillty demonstrated 
Relevant track record 
Familiarity with team's reputation 
Referred by a trustworthy source 
Protection of product 
Demonstrated market acceptance 
Functioning prototype 
High-tech product 
Established distribution channel 
Target market has high growth rate 
Existing market would be stimulated 
Familiar with industry 
Competition anticipated in two years 
Change competitive structure of industry 
Venture could create a new market 
I Opportunity to double value in three years No subsequent investments I I First round of investment 
(Gresham: 2004) 
Two factors mentioned in the preceding discussion, namely team and demonstrated 
market acceptance, are listed in Table 3-1. The factor isolation from competition is not 
mentioned directly in this table and it can be accepted that there is not agreement on 
whether it is a relevant predictor of venture success. 
3.3.2 Venture capital screening criteria 
The findings of five different academic studies regarding venture capital screening criteria 
are summarized in Table 3-2. 
Table 3-2 
VC screening criteria by Hall and Hofer 
Venture capital firm I Cash-out potential 
requirements 
(This is discussed under 
3.2.) 
Characteristics of the 
proposal 
Equity share 
Familiarity with technology, product, and market 
Financial provision for investors 
Geographic location 
Investor control 
Rate of return 
Risk 
Size of investments 
Stage of development 
Requirement for additional material 
Stage of plan 
entrepreneurheam 
Nature of the proposed 
industry 
I 
Leach & Melicher (2003:4 
Ability to evaluate risk 
Articulate regarding the venture 
Backgroundlexperience 
0 Capable of a sustained effort 
0 Managerial capabilities 
Management commitment 
References 
Stake in firm 
Market attractiveness 
Potential size 
Technology 
0 Threat resistance 
In Table 3-2 there is a strong emphasis on team and industry factors. 
3.4 Summary 
From the above discussion the following is clear: There is general consensus on the main 
characteristics that make a venture successful. If one investigates the sub-characteristics, 
authors and venture capitalists differ significantly on what should be important. This 
conclusion is confirmed by Table 3-1 and Table 3-2. The following must also be taken into 
account: If the average time that an entrepreneur spends on screening proposals is 
between six and 15 minutes, both the screening criteria outlined in Table 3-2 and the 
venture success prediction factors in Table 3-1 appear to be too complicated to be used in 
the initial screening process. The Timmons Model will now be investigated to determine if 
it is suitable to be used in the initial screening of new ventures. 
3.5 The Timmons Model 
According to Timmons (1975:50), a successful new venture requires the right combination 
of people, a good idea, and money. Timmons refined this concept in his later publications 
and he created the Timmons Model of Entrepreneurial Success (Figure 3-1). 
Figure 3-1 
The Tirnrnons Model of the Entrepreneurial Process 
, 
Ambiguity , \ , 
creativity 
Uncertainty 
A 
Founder 
Timmons & Spinelli (2003:57) 
According to this model, three aspects are crucial to the entrepreneurial process, namely, 
the opportunity, the team, and resources. All aspects that are included in the model are 
equally important and must be present for a venture to succeed. All these aspects must 
also be in equilibrium for a venture to have the best chance of success. A high-potential 
opportunity cannot be taken on with a weak team or insufficient resources. Likewise, a 
low-potential opportunity cannot be pursued with a very strong team. Resources are also 
important. A good team with a good opportunity will not guarantee success without 
financial resources. 
The advantage of this model is that it is a simple and powerful framework for analysing 
ventures. The three main elements of the model will now be investigated. 
3.5.1 Resources 
Resources include the following: 
. People (everybody, including outside personnel, involved in the venture) 
. Financial resources 
. Assets 
. A business plan 
Timmons (1980:28) places a high premium on a business plan. When one seeks venture 
capital, the submission of a business plan is usually the point of departure. An 
entrepreneur wants to extract financial resources (an investment) from a venture capitalist 
in order to give his venture a bigger chance of survival. 
3.5.2 The team 
Timmons and Spinelli (2003:59) draw a distinction between the entrepreneurial leader and 
the rest of the team. One of the tasks of the entrepreneurial leader is to build a good team. 
The team is, therefore, a very important component in the entrepreneurial process. 
3.5.3 The opportunity 
An opportunity has the qualities of being attractive, durable, and timely. Furthermore, an 
opportunity is anchored in a product or service which creates or adds value for its buyer or 
end user. The opportunity should be the starting point for screening opportunities, because 
the most successful entrepreneurs, venture capitalists, and private investors are 
opportunity focused - they start with what the customer or the marketplace wants. 
According to Timmons and Spinelli (2003:92-93), the following aspects are important when 
evaluating an opportunity: Industry and market, economics, harvest issues, competitive 
advantage issues, management team, fatal-flaw issue, and strategic fit differentiation. The 
factors that are associated with each of these aspects are reflected in Table 3-3. 
Table 3-3 
Criteria for evaluating venture opportunities 
Iconomics 
iawest issues 
:ompetitive 
~dvantage issues 
illanagement team 
:atal-flaw issue 
Jersonal criteria 
. . 
Market itructure . 
Market size 
Growth rate 
Market capacity 
Market share attainable (year flve) 
Cost structure 
Time to break evenlpositive cash flow 
ROI potential 
Capital requirements 
Internal rate of return potential 
Free cash flow characteristics: Sales growth, asset intensity, 
spontaneous working capital, RlLDlcapital expenditure, 
gross margins, after-tax profits 
Time to break even, profit and loss 
Value-added potential 
Valuation multiples and comparables 
Exit mechanism and strategy 
Capital market context 
Fixed and variable costs 
Control over costs, prices and distribution 
Barriers to entry (proprietary protection, responsellead time, 
legallcontractual advantage, contacts and other networks, 
and key people) 
Entrepreneurial team 
Industry and technical experience 
Integrity 
Intellectual honesty 
Goals and fit 
Upsideldownside issues 
Opportunity costs 
Desirability 
Riskheward tolerance 
Stress tolerance 
Strategic I Degree of fit 
differentiation ~ e a m  
Service management 
Timing 
Technology 
Flexibility 
Opportunity orientation 
Pricing 
Distribution channels 
Room for error 
3wn adapted from Timmons and Spinelli (2003:92-93) 
3.5.4 Summary 
Although the Timmons Model is extremely simple, the same cannot be said about the 
criteria for evaluating business opportunities. What is also important is that some of the 
same factors previously mentioned are mentioned again. 
The real preferences of venture capitalist firms will be tested in a questionnaire. The above 
criteria will be included in this test. Before this is done it would be worthwhile to ask the 
following question: Should venture capitalist firms have additional screening criteria in the 
light of the socio-economic problems facing South Africa? 
3.6 Corporate citizenship, legislation and venture capital screening 
3.6.1 The role of government in the economy 
The government's role in the economy should not be underestiinated. One analyst added 
the government as a sixth force to Porter's Five Forces model (Vining eta/., 2000:2). In 
South Africa, the government plays an active role in legislation and regulatory 
requirements. Sometimes this involvement has the desired effect, but sometimes the law 
of unintended consequences takes its course. In South Africa, this 'sixth force' is extremely 
relevant. 
30
3.6.2 Corporate citizenship
When we investigate the global trend of corporate citizenship the following is important:
Corporations do not only exist for the purpose of maximizing shareholders' value, but also
to benefit the broader community where they operate. Figure 3-1 presents an overview of
the elements of corporate citizenship.
Figure 3-1
Categorizing elements of citizenship
Governanceand Management
Society
Impactof
operations&
products
Enterprise
support
Preferential
procurement
Companycontrol
Enterprise
support
Productaccess
Economicvalue
support
Enterprise
support
Socialinvestment
Supplrchain
compliance
Employees
Workplace quity
Skills&training
Health&saf(/ty
HIV/Aids
~.~-~.
Product
stewardship
Socialimpactof
operations
HIV/Aids
Transformation
Humanrights
TrialoQue(2004:34)
When one investigatesFigure 3-1, it is importantto note the following:Many of the issues
surroundingcorporate citizenship are part of the politicaldebate in South Africa. These
issues are not only debated, but are, in some cases, also prescribed in legislationand
guidelines.
Table 3-4 presentsan overviewof formalprecedentsfor good citizenship.
Supply Work- Market-
chain place place
supplychain Impactof Impactof
impact opetions products
Table 3-4 
Formal precedents for good citizenship 
- 
Prescribed laws, 
conventions and 
~tandards 
Guidelines 
Transformation 
initiatives 
Trialogue (2004:20: 
International Labour Organization 
Standards 
IS0 9000 
IS0 14000 
OHSAS 1800 
Basic Conditions of Employment Act 
Labour Relatins Act 
Occupational Health and Safety Act 
National Environmental Management Act 
Mineral and Petroleum Resources 
Development Act 
National Water Act 
Directors' fiduciary duties 
Common law and judicial precedent 
NOSA grading 
I 
Global Reporting Initiative I King II 
I Industry Charters 
AAl 000 Series 
SA8000 Standard 
Global Compact 
Sigma Guidelines 
Dow Jones Sustainability lndex 
FTSE4Good lndex 
'Region-specific' initiatives 
South Africa is a highly regulated country in which to conduct business. Any venture 
capitalist who ignores the effect of government regulations on future ventures is foolish 
and doomed to run into difficulty. Furthermore, there are numerous government 
regulations and laws that are applicable to any industry that cannot be classified as part of 
good corporate citizenship. 
JSE Listing Requirements 
JSE SRI Index 
Broad-based BEE Act 
Employment Equity Act 
Skills Development Act 
3.6.3 Black Economic Empowerment (BEE) 
The transformation initiatives reflected in Table 3-4 are extremely relevant to the South 
African economy today. Transformation is one of the most discussed topics in civil society 
debates. Hardly a day goes by without the announcement of a new empowerment deal or 
initiative in the press. BEE is changing the country as never before. 
A venture capitalist in South African cannot ignore this trend as it is part of the political 
landscape. Therefore, it is recommended that BEE be included in the initial screening 
phase of venture capitalist firms. 
3.6.4 Conclusion 
Following from the above discussion it can be argued that the following aspects are also of 
critical important for the success of ventures in South Africa: 
Good corporate citizenship 
BEE 
Compliance with internal legislation 
These aspects must be considered during the initial screening phase, because they are of 
critical importance for the sustainable success of a venture. 
3.7 Summary of critical factors regarding screening phase 
From the preceding analysis the following is important: To screen a venture, venture 
capital firms first use internal fund preferences to determine if the venture fits their 
investment preferences. Venture capital firms conduct venture analyses according to 
factors that they deem important. They should include factors relating to corporate 
citizenship in the initial screening of a venture. 
The following preliminary framework emerges from this chapter and will be tested in the 
empirical study: 
Venture screening framework 
1. Internal fund preferences 
Does the venture meet the following internal fund preferences of the fund? 
Minimum investment amount 
Maximum investment amount 
Industry preferences 
Industry exclusion preferences 
hvestment stage 
Minimum and maximum percentage equity taken up 
Geographic preference 
Investor control 
Familiarity with technology 
Product and market risk 
Stage of development 
2. Venture analysis 
Does the venture have the potential for above-average return on investment when the 
following factors are taken into account? 
Team 
Management team 
Lead entrepreneur 
Resources 
People (discussed under team) 
Financial resources 
Assets 
Business plan 
Opportunity 
Industry and market 
a Economics of the business 
Harvest issues 
Competitive advantage 
Fatal-flaw issue 
Strategic differentiation 
3. Corporate citizenship (South Africa specific) 
Will the venture be a good corporate citizen? 
BEE credentials 
Contribution to the community (for example, job creation) 
Industry-specific laws of the country 
The next chapter will focus on actual preferences of venture capitalist firms in South Africa. 
Chapter 4 
Empirical study of venture capitalist 
companies in South Africa 
4.1 Introduction 
In the previous chapter the critical factors for venture analysis were investigated. Most 
analysts agree on the main factors, but disagree on the specific factors. The question 
arises whether South African venture capitalists should have different criteria for analysing 
venture opportunities. 
The following empirical study will seek to answer many questions on the initial screening 
phase of the venture capital process in South Africa. The empirical study will focus on the 
critical factors that each venture capitalist believes is important in the initial screening 
process and the relative weight that is assigned to each factor. The study was conducted 
as follows: 
4.2 Sample selection 
The following criteria were used in the sample selection to ensure that the sample used 
was representative of the population of venture capitalists in South Africa: 
a) Only full members of the South African Venture Capital and Private Equity 
Association were investigated. 
b) Of these companies, companies with a minimum investment amount of R10 million 
or below were investigated. 
c) From this sample, only companies that offer real venture capital (that is, companies 
that invest in seed capital or in the early stages of the business cycle) were 
selected. All companies without clear preferences were disregarded. 
Table 2-2 (Financial cycle investment stage preferences by South African VC companies) 
reflects all the companies that meet the above criteria. Initially this sample consisted of 23 
companies. When these companies were contacted telephonically it was determined that 
six companies did not provide venture capital, but provided private equity only. Another 
company was in the process of being liquidated. The sample was narrowed down to 16 
companies. 
4.3 Data collection 
In order to obtain information from the widest possible audience the Internet was chosen 
as the medium for collecting data. Respondents were asked to complete an online 
questionnaire. All respondents were also contacted via email and/or telephone to request 
them to take part in this study. 
Respondents were assured that they could complete the questionnaire anonymously. 
However, there were fields on the response form where a user could provide hislher 
contact details if helshe wished to receive a copy of this research upon completion. 
Although this questionnaire could be completed anonymously, the server recorded the IP 
address of each respondent. This data was not collected for any malicious reasons, but to 
ensure that invalid answers were disregarded if someone tried to manipulate the 
questionnaire by completing more than one form. This was not a 100 percent foolproof 
mechanism, but it would prevent 98 percent of all rigging attempts. The IP address could 
also be an indication of which respondents completed the questionnaire. 
4.4 Questionnaire 
As stated earlier, a questionnaire was used as the sole method of data collection. This 
questionnaire consisted of open-ended questions and Likert-scale questions. The open- 
ended questions served the purpose of enlightening us on more general information, whilst 
the Likert scale served to provide us with information on the relative importance of each 
factor. The values of each option were as follows: 
1 -Always reject 
2 - Sometimes reject 
3 - Neutral 
4 - Sometimes approve 
5 -Always approve 
4.5 The questions 
From the preceding discussion a number of factors were identified. These factors are 
listed below together with the questions that were used to measure them. 
Table 4-1 
Questions to be asked to venture capitalists in South Africa 
I I screening phase? 
2 1 General 1 What are the main reasons for rejecting these I 
Open-ended questions 
opportunity if - 
Internal fund preferences 
5 1 Minimum investment amount I the amount requested is 10% less than your 
What percentage of all applications for venture 
capital does your company reject in the initial 
1 
3 
4 
General 
I I I list? I 
Likert-scale questions 
Please answer the next questions with the following in mind: An entrepreneur presents you 
with a good investment opportunity. What are the chances that you will reject the 
General 
General 
6 
7 
1 9 1 Minimum and maximum I the percentage equity taken up is within your I 
- 
applications? 
Have you invested outside your stated venture 
capital criteria? 
What return on investment (ROI) does your 
company require over five years? 
I percentage equity taken up I range of investment preferences? 
10 1 Geographic preference 1 the venture is outside your preferential 
Maximum investment amount 
Industry preferences 
I I I geographic area? I 
minimum investment amount? 
the amount requested is 10% more than your 
maximum investment amount? 
the industry is not on your preferential industry 
11 I Investor control I vou will have a high degree of control in the 
~~ ~~~ ~~~ 
;nanagement of t6e venture? 
12 Investor control you can veto all important decisions in the 
management of the venture? 
13 Familiarity with technology you are not familiar with the technology 
necessary to make the venture successful? 
Product and market risk (see opportunity analysis) 
14 Stage of development the venture needs seed capital? 
15 Staae of develooment the venture needs start-uo caoital? . . - - - ~  "- -~ - . 
16 1 Stage of development i the venture is in the earl igrokh stage? 
Venture analysis 
I Team 1 
17 1 Manaaement team I the management team consists of one 
- I entrepreneur? 
18 1 Management team 1 the management team has a lot of experience in 
- I the field? 
19 1 Management team I the management team is adequate to make the 
20 1 Team vs. oooortunit' 
venture a success? 
the management team is mediocre, but it is a 
21 1 Business plan I the business plan projections look realistic? 
22 1 Business olan I a orofessional-lookina business olan was 
23 1 People 
24 Financial resources 
- 
p;esented to you? 
the company will be able to hire all the people 
needed to make the venture successful? 
the company will have enough financial I resources to make the opportunity a success? 
25 1 Assets I the company has the necessary equipment to I make the venture successful? 
26 1 Resources vs. team I there are inadeauate resources, but an A-rated 
management team? 
Opportunity 
27 Industry and market the product has an established market? 
28 Industry and market the business is in a declining industry? 
29 Industry and market the market share attainable at year five is 20%? 
30 Economics of the business the business will take three years to break even? 
31 Economics of the business the expected ROI is 10% per year after five 
years? 
32 Economics of the business the expected ROI is 20% per year after five 
years? 
awest issues the compar 
1 34 1 Harvest issues you will be able to sell your in 
company after three years? 
35 Competitive advantage the opportunity has significant barriers to entry? 
36 Competitive advantage the company is well positioned in the value 
chain? 
37 Competitive advantage I team the company has an A-rated team? 
38 Strategic differentiation I business the company has a welldeveloped strategy? 
I plan 
39 Opportunity vs. resources it is an A-rated opportunity, but the company 
does not have enough resources? 
Coroorate citizens hi^ 
- .  
example, job creation) profit potential? 
43 Contribution to the community (for the venture will not create any jobs, but it has a 
example, job creation) high profit potential? 
44 Industw-s~ecific laws of the the venture is in com~liance with all the laws of 
I . . 1 country I the country? I 
The next chapter will focus on the results of the survey. 
Chapter 5 
Survey results 
5.1 Introduction 
Some surveys are uninteresting and generate predictable results while other surveys add 
more value to a topic than anticipated beforehand. This survey generated direct 
information on the factors investigated, but it also generated indirect information on the 
nature of venture capitalists. One of the indirect factors that were confirmed in this study is 
that venture capitalists are protective of their time. I was screened by various companies 
and could not get hold of the real venture decision makers to ask them to complete the 
survey. Other potential participants disregarded numerous emailed and telephonic 
messages in which they were invited to participate in the survey. A common complaint that 
was received was that the questionnaire was too long. This resulted in the non- 
participation of at least one respondent. 
In hindsight, some of the above problems could have been avoided if it had been borne in 
mind that venture capitalists are very jealous of their time. A shorter questionnaire should 
have been drawn up. The rest of this chapter will focus on what can be learned from the 
research project. The statistically processed survey results are contained in Appendix B. 
5.2 Research sample 
Of the 16 eligible VC companies identified in Table 2-2 (Financial cycle investment stage 
preferences by South African VC companies), nine companies participated in the survey. 
Five companies ignored all pleas to complete the questionnaire. Two provided reasons for 
their non-participation, one was in the middle of a restructuring process and could not 
complete the questionnaire and another had a very effective screening agent. This agent 
stressed that all consultants were very busy and did not have time to complete the 
questionnaire. 
These non-participating companies also provided some insight into the world of venture 
capitalists and it is in line with theory that venture capitalists do whatever they can to limit 
unproductive demands on their time. If a company did not complete the survey it was 
contacted a few times telephonically and via email. 
The company that was being restructured was deducted from the sample, leaving a 
potential sample of 15 companies. Consequently, a response rate of 60 percent was 
achieved. 
5.3 Factor analysis 
The questions set out in Table 4-1 (Questions to be asked to venture capitalists in South 
Africa) were posed to all participants. During the processing of the results, some surprising 
responses emerged. Some of the questions that were supposed to measure certain 
factors were thrown out, because it would be impossible to measure a certain factor with a 
specific question as in the case of, for example, question 26 ("Resources vs. teamn). The 
following is an analysis of the responses obtained in the questionnaires. 
5.3.1 General 
A few general questions were asked. It was determined that, on average, 81 percent of all 
applications for venture capital are rejected in the initial screening phase. The highest 
value under this question was 99 percent, whilst the lowest value was 25 percent. The 
median for this sample was 90 percent and the value of the lower quartile (QI) was 80 
percent, pointing to extreme values at the lower end of the scale. If the lowest value is 
disregarded the average drops to 88 percent and the standard deviation to 10 percent. 
The high rejection rate in the screening phase in the South African context is in line with 
venture capitalist theory as discussed in Chapter 2. 
5.3.1.1 Reasons for rejections 
When the reasons for rejections were investigated the following responses were obtained 
in the open-ended questions: 
a) Company A only invests in insurance premiums generating businesses and only in 
niches in which the company is not already involved. 
b) Company B indicated that it rejects an application if the venture does not fall within 
the mandate of the fund. 
c) Company C rejects applications in the following instances: The project falls outside 
the company's mandate; the absence of an experienced operating partner; 
insufficient financial commitment from the promoter; and an overly ambitious project 
concept and projections. 
d) Company D indicated that its initial screening is very brief and merely consists of 
establishing if the company's core criteria are met. 
e) Company E currently does not have a mandate to invest in early stage or start-up 
operations. However, an exception is made if the management of the 'start-up' have 
relatedlsimilar industry experience which they use in a venture of their own. In this 
situation the company will assess the opportunity. 
f) Company F listed the following factors that lead to the rejection of applications: A 
poor business case for addressing market needs; and the inability of an applicant to 
provide requested information in a qualitative manner and timely. 
g) Company G rejects an application if the venture does not meet certain investment 
criteria, that is, if it is too small or in too early a stage. 
h) Company H listed viability, gearing, and risk as factors that contribute to 
applications being rejected in the screening phase. 
i) Company I rejects applications if they do not meet the company's 
investmenttlending criteria. 
At least six of the nine responses can be traced back to the mandates of the VC 
companies. By implication, the fund mandate is very important for venture capitalists. If the 
responses to the question "Have you invested outside your stated venture capital criteria?" 
are analysed, the aspect of fund mandate is highlighted. Only 33 percent of the 
respondents have invested outside the scope of their investment criteria. 
5.3.1.2 ROI over five years 
Question 4 regarding ROI could have been interpreted differently by different respondents. 
One respondent stated that the expected ROI over five years for the company is 200 
percent, whilst all the other respondents expressed their ROI over five years in single-digit 
figures. If one disregards the one extreme value the mean ROI over five years (expressed 
as ROI per year) is 26,21 percent, with a standard deviation of 9,5 percent. The lower 
quartile (QI) is 19,25 percent and the upper quartile (Q3) is 32,5 percent. 
Question 4 can be linked to questions 31 and 32. Most applicants will reject an ROI of 10 
percent per year and most will not reject or approve an opportunity if the ROI is 20 percent 
per year. At an ROI of 20 percent the standard deviation is 1,8 percent which is quite high 
on a five-point scale. Some respondents would accept an ROI of 20 percent per year, but 
some would reject it. This is confirmed by the Q1 of 19,5 percent in question 4, which 
indicates that at least 25 percent of the respondents would accept an ROI of 19,5 percent 
per year. 
The ROI of investments is relatively high. Given the fact that the prime rate is currently at 
11 percent, the average expected return is 2,38 times more than what a company can 
expect if it is lending out money. This expectation is in line with the theory that venture 
capitalists expect an above average return on investment. 
5.3.2 Internal fund preferences 
From the general questions it was determined that most respondents place a high 
premium on their investment mandate. Attempts have been made to isolate important 
factors in this regard. 
Table 5-1 presents the processed results obtained from the questionnaire. One factor, 
'development stage', was removed, because the questions posed concerned the 
respondents' preferred investment stage and not the relative importance of the investment 
stage and their internal fund preferences. 
In the processing of the results, some questions were transformed into a positive value. 
Question 8 is an example of a negative question. In this instance, what had to be 
determined was the likelihood of a venture being approvedlrejected if an industry is not on 
a respondent's avoid list. To obtain a positive value the following formula was applied: 6 - 
average value. A word of caution is given to future researchers to not use too many 
negative questions, as negative questions might be ambiguous and overly complicated to 
respondents and are relatively difficult to process. 
Table 5-1 
Internal fund preferences factors 
Familiarity with technology 336 
-. 
Industry preferences 3,95 0,95 
Geographic preference 3.89 1,s 
Investment amount 3.89 1.16 I Investor control 4.17 1 I ~- ~ ~ 
Minimum and maximum percentage equity taken up 4,22 1.0 
The factor 'percentage of equity taken up' is the most important factor and 'familiarity with 
technology' is the least important factor in Table 5-1. All factors fall within the 'sometimes 
approve' window. The average value for this group is 3,94, with a standard deviation of 
1,12. The deduction can be made that if a venture opportunity complies with the internal 
fund preferences of a venture capital company, it is sometimes approved. The group 
average will be meaningless if it cannot be compared with the averages of other groups. 
The next group that will be investigated is venture analysis. 
5.3.3 Venture analysis -team 
In respect of this factor, one question, namely question 17, was disregarded, because the 
size of a management team generally does not determine its strength. The average of all 
responses to questions 18, 19, and 37 was 4,44, with a standard deviation of 0,83. This 
result suggests that the strength of a management team is a relatively significant factor 
and if a team is strong, the opportunity sits between 'approve' and 'always approve' on the 
Lickert scale. The relative importance of the other two main areas of the Timmons Model 
will now be investigated. 
5.3.4 Venture analysis - resources 
Table 5-2 presents the results of the factors relating to resources. What is important is that 
all values are relatively close to each other. Question 38 has also been included in the 
calculation of the 'business plan' factor. 
Table 5-2 
Venture analysis - resources factors 
l ~ s s e t s  I 4.11 I 0.9 1 
The average of the responses to the resources factor was 4.14, with a standard deviation 
of 0,7. 
Business plan 
5.3.5 Venture analysis - opportunity 
4.22 1 0.7 
In respect of this factor, questions relating to 'economics of the business' were 
disregarded, because they were used in the general section, and they were asked 
incorrectly and could not be used to measure the relative importance of, for example, the 
ROI. This was also the case with the questions relating to 'industry and market'. Question 
38 was also disregarded under 'opportunity', because it cannot measure an opportunity as 
such, but rather a business plan. This question has been added to the business plan 
factor. Table 5-3 presents a summary of the 'opportunity' factors. 
Table 5-3 
Venture analysis - opportunity factors 
People 
General on opportunity 
4.22 1 1 ,O 
The average value of all factors under 'opportunity' was 4,38, with a standard deviation of 
0,81. The averages of the three main factors under venture analysis, namely team, 
resources, and opportunity, fell within the 'sometimes approve' and 'always approve' 
window. The next aspect that will be investigated is the responses obtained in the 
corporate citizenship section. 
5.3.6 Corporate citizenship 
This factor was added to put this research in a South African context. Table 5-4 presents a 
summary of the results. One negative question ("... the venture will not create any jobs?") 
has been reversed to gain a meaningful result for the factor 'contribution to the 
community'. 
Table 5-4 
Corporate citizenship factors 
BEE credentials 3 5  1 1,15 
Industry-specific laws of the country 4,33 1 1 
As reflected in Table 5-4, corporate citizenship is the only section with relatively low 
scores. It seems that BEE credentials are only marginally important when a new venture 
opportunity is screened. The standard deviation regarding this factor is relatively high, 
pointing to dissonance among the respondents. 
In respect of the factor 'contribution to the community', a more significant result was 
obtained. It appears that venture capitalists are keen to reject ventures that make a 
contribution to the community. The standard deviation under this factor was 1,34, which 
indicates divergent opinions among the respondents. One possible cause for the low score 
under this factor is that people choose to measure the contribution that a venture makes to 
the community in terms of job creation. 
Job creation in South Africa is a complex issue. The government has implemented labour 
legislation that keeps people unemployed, because the legislation makes it very difficult to 
terminate service contracts of underperforming workers. Therefore, venture capitalists 
could perceive job creation as an additional business risk. 
The only factor that scored relatively high was 'industry-specific laws of the country'. The 
average score for 'corporate citizenship' was 3,48, with a standard deviation of 1,16. 
5.4 Summary of results 
From the preceding discussion of the results the following table was created, indicating the 
relative importance of each main factor in the venture capitalist decision-making process: 
Table 5-5 
Summary of results 
The following ambiguities regarding these results must be investigated: 'Internal fund 
preferences' scored relatively high, but the score is still below the venture analysis factors 
taken from the Timmons Model. Furthermore, this factor is stated as a reason for rejecting 
applications in six of the nine open-ended questions about reasons for rejection. Given the 
fact that only 33 percent of the respondents have invested outside their stated investment 
criteria, internal fund preferences is a factor that must be taken into consideration and is 
more important than the Lickert-type questions indicate. 
On a more practical level, if a venture capital seeker goes to 66 percent of venture 
capitalist companies with a strong enforcement policy on internal fund preferences there is 
almost a 100 percent likelihood that the application will be rejected. For a venture capital 
seeker to be successful (and not waste his own and the VC company's time), he must first 
analyse the venture capitalist company's internal fund preferences before making an 
application. As already stated, these preferences can usually be found on the websites of 
venture capitalists. 
In respect of venture analysis, it was determined that this factor is also important in the 
initial screening phase. From the above discussion it can be argued that venture analysis 
is still not as important as internal fund preferences. Although all three factors scored 
between 4,14 and 4,44, 'management team' was identified as the most important factor. 
The opportunity and resources are also important. For supporters of the Timmons Model 
this is good news. It seems that this model can be used to analyse venture opportunities, 
seeing that all the main factors in the model scored high in this empirical study. A venture 
capitalist seeker can also use this model to analyse his own opportunity in order to 
determine if it has the potential to pass the scrupulous screening of venture capitalists. 
Another important aspect in opportunity analysis is the required rate of return for venture 
capitalists. The average ROI value is 26,21 percent and the median is 25 percent. For a 
venture capitalist seeker this implies that the ROI of an opportunity must be at least 25 
percent per year to have a 50 percent chance that the opportunity will not be rejected on 
the grounds that it has too low potential. 
Regarding corporate citizenship, it is important for venture capitalist seekers that their idea 
is in compliance with the laws of the country. Internal fund preferences and venture 
analysis appear to be much more important to venture capitalists than job creation or BEE. 
This is quite surprising, given South Africa's unique problems and the government's focus 
on BEE. 
5.5 Framework for venture capital seekers 
Based on the preceding research, the following generic framework has been created for 
venture capitalist seekers: 
FRAMEWORK FOR VENTURE CAPITAL SEEKERS 
Before you contact a venture capitalist first answer the following questions: 
Does your opportunity fit the internal fund preferences of the venture capitalist 
that you want to contact for venture capital? (Go to the company's website.) 
Does your opportunity offer a return on investment of at least 25 percent per 
year to the venture capitalist? 
Do you have a good management team? 
Is it a good opportunity? (Use the following terms to prove to the venture 
capitalist that it is a good opportunity: industry and market, harvest, and 
competitive advantage.) 
Do you have the necessary resources to make the opportunity a success? 
(Investigate the following resources: people, assets, financial resources, and 
your business plan.) 
Is your opportunity in compliance with the laws of the country? 
If you cannot answer 'yes' to all these questions, revisit your business plan or 
investigate another opportunity. 
5.6 Closing 
At the end of this study it will be useful to revisit the objectives to the study as laid out in 
Chapter 1. The primary objective of the study was to identify the critical factors that play a 
role in the screening phase of venture capital applications. The secondary objective was to 
gain an understanding of the reasons for the high rejection rate of venture capital 
applications in the initial screening phase. The third objective was to identify the 
information that venture capitalists should publish to discourage non-qualifying venture 
capital seekers to apply for venture capital. 
All three objectives have been met. In the field study, a number of critical factors were 
identified. It was argued that the most important factors related to the internal preferences 
of a venture capitalist fund. One of these preferences is the ROI of an opportunity. Once 
these preferences have been met, other factors become important. In this regard, a 
venture capital seeker can use the Timmons Model to analyse an opportunity. It was also 
determined that corporate citizenship does not play a big role in the initial screening 
phase, but a venture capitalist firm will reject an outright illegal venture proposal. 
The second objective, that is, to gain an understanding of the high rejection rate, has also 
been met. Arguably, most applications that are rejected by venture capitalist firms do not 
meet the internal preferences of the specific venture capitalist firms. 
In respect of the third objective, the argument has been made that the relevant information 
has already been published and is freely available on various venture capitalist companies' 
websites. This study did not include a detailed audit on each of the studied venture 
capitalist companies' websites, but the required ROI is not freely published. This might 
scare off some small investors. 
The venture capitalist industry, as any other industry, plays by certain rules. The best 
advice that can be given to a potential venture capitalist seeker is to use the Framework 
for Venture Capital Seekers in the quest for venture capital. 
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55
Appendix A
Evaluationfactorsusedindifferentstudies
FigureA-1
Evaluationfactorsusedindifferentstudies
(Birrer,2002:11)
--;;;. --;;;..<--;;;. --;;;. "':;0 ---;t ....:r::....0tD _. tDn tDn 2: tD3 tDPJ(j) 15. $ Q;- - -m .:; -aor or
Study
(1) go :::::2 :::::2 :J:...
c:J !1 !1 !1
2
!» !»:::::2
...
0
16 -g ;a.§ CiS
m !!§ m .g a-cI: -.(D cI: m.:::::2 0 OVJ 0 § 0 '0m. :::::2
SC
:::::2 :::::2
Method S' :::::2 :::::2
:::::2 :::::2 a
2:1, PJ.< PJ PJ 2:1.Ci ro @ @. @. ro
S. go Q.
it
<:n .....
Sample Size ()') go a
;;;.;a;
Q 0')
.....
entreDr.,ne.Urrl.team.rh.aracti$tiQ$hihhf ....f..........r..@r. 0 ".'i. i,.,f 19,
Momtskills and exoerience X X X X X X X X
Ventureteam X X X X
Momtstake in firm X X
Personal motivation x x
EntreDren.oersonalitv x 1
I?r()<fuct{serVicecharadertlC$ 'f);f' .r.i f.....r....r... 1
Productattributs x x x X A
Productdfferentations x x 4
ProDrietarv x x x .:
Growthootential x 1
Marketacce x x
ProtDtvoe x 1
NIdi f fh< " ,r,r.t;Th' 'if I..@'rld.,.'."",. ,'ii'
8M/V.'.., 'rr.:+h'@f'
Marketsize x x x X A
Marketarowth x x x x x
BarrierstoentrY x x
Comoetitivethreat x x x
Iventurecreatesnewmkt x 1
F.iriariciSlcharacteristics"
'H_
,.r.y.........fr........... 'f9hv fh'.. rsr..;f
Cash-outmethod x x x
ExoectedROR x x x x
Expectedrisk x 1
percentaaeofeQuity x 1
Investorprovisions x 1
Sizeof investment x x
Llauiditv x x x j
'f" 'jw.>'Ii..'01r ...3':......if fr.fj
References x x
!venturedeveloomentstaae x x
IVCInvestmentcriteria x
56 
Appendix B 
Statistically processed survey results 
I rejected 
I I I I I I I 
2 General Reasons for rejection 
I I I I I I I 
3 I General I Invested outside own 1 33% 1 
I I investment criteria 1 I I I I 
4 General Required ROI over 5 years 27,94 27,5 10,l 21,38 
5 Internal fund Minimum investment amount 4 4 1 2  4 
preferences 
6 Internal fund Maximum investment amount 3,78 4 1.1 4 
preferences 
7 Internal fund lndustrv  references 3.11 2.89 3 1.5 2 
. . 
preferences 
8 Internal fund Industry exclusion preferences 4,78 1,22 1 0 4  1 
preferences 
9 Internal fund Minimum and maximum 4.22 4 1 .O 4 I preferences I percentage equity taken up 
10 1 Internal fund I Geoara~hic  reference 1 3.89 1 2.11 1 1 1 1 . 5 1  1 
- .  . 
preferences 
11 Internal fund Investor control 4 4 1-0 4 
preferences 
12 Internal fund Investor control 4.33 5 1 .O 4 
I preferences 
13 1 Internal fund I Familiaritv with technoloav 1 3.56 1 I 4 I 1.1 1 3 ". I preferences 
14 1 internal fund I Staae of devel0Dment 1 2.67 1 I 2 1 1 . 4 1  2 
- 
preferences 
15 Internal fund Stage of development 3,56 4 1.6 3 
preferences 
16 Internal fund Stage of development 344 4 1,4 2 
preferences 
What percentage of all applications for venture capital 
does your company reject in the initial screening 
What are the main reasons for rejecting these 
applications? 
Have you invested outside your stated venture capital 
criteria? 
36,25 What return on investment (ROI) does your company 
require over five years? 
5 ... the amount requested is 10% less than your 
minimum investment amount? 
4 ... the amount requested is 10% more than your 
maximum investment amount? 
4 ... the industry is not on your preferential industry list? 
I 
1 ... the industry is on your avoid list? I 
5 ... the percentage equity taken up is within your 
range of investment preferences? 
4 ... the venture is outside your preferential geographic 
area? 
5 ... you will have a high degree of control in the 
management of the venture? 
5 ... you can veto all important decisions in the 
management of the venture? 
4 ... you are not familiar with the technology necessary 
to make the venture successful? 
4 ... the venture needs seed capital? 
I 
5 1 ... the venture needs start-up capital? 
I 
4 ... the venture is in the early growth stage? I 
Venture analysis - 
team 
Venture analysis - 
team 
Venture analysis - 
team 
Venture analysis 
Venture analysis - 
resources 
Venture analysis - 
resources 
Venture analysis - 
resources 
Venture analysis - 
resources 
Venture analysis - 
resources 
Venture analysis 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Venture analysis - 
opportunity 
Management team 4,44 5 1,O 4 5 
Management team 4-44 5 1,O 4 5 
Team vs. opportunity 3 3 2 1.2 2 4 
Business plan 4,22 4 1.0 4 5 
I I I I 
Business plan 4 4 0,7 4 4 
People 4,22 4 1.0 4 5 
Financial resources 4 4 12 4 5 
Assets 4,11 4 0 3  4 5 
entrepreneur? 
. .. the management team has a lot of experience in 
the field? 
... the management team is adequate to make the 
venture a success? 
... the management team is mediocre? 
.. . the business plan projections look realistic? 
. .. a professional-looking business plan was I 
presented to you? 
... the company will be able to hire all the people 
needed to make the venture successful? 
- 
... the company will have enough financial resources 
to make the opportunity a success? 
... the company has the necessary equipment to 
make the venture successful? 
Resources vs. team 4,11 4 0.6 4 4 ... there are inadequate resources? 
Industry and market 4.22 4 1 ,0 4 5 ... the product has an established market? 
, 
Industry and market 3.67 2.33 2 0.9 2 3 ... the business is in a declining industry? 
Industry and market 3,56 4 1 ,0 3 4 ... the market share attainable at year five is 20°h? 
Economics of the business 2.67 3 1,4 1 4 ... the business will take three years to break even? 
Economics of the business 1.56 1 1 .0 1 2 ... the expected ROI is 10% per year after five years? 
Economics of the business 2,89 2 18 1 5 ... the expected ROI is 20% per year after five years? 
Hawest issues 4,22 4 1,o 4 5 ... the company has a well-defined exit strategy? 
Hawest issues 4.1 1 4 0.9 4 5 ... you will be able to sell your investment in the 
company after three years? 
Competitive advantage 4 4 1,O 4 5 ... the opportunity has significant barriers to entry? 
Competitive advantage 4,11 4 0.9 4 5 ... the company is well positioned in the value chain? 
" , , I opportunity 
38 1 Venture analysis - I Strateaic differentiation I 1 4.22 1 I 4 1 0.4 1 4 1 4 1 ... the com~anv has a well-developed strateav? I opportunity I busin& plan . . -. 
40 
41 
42 
43 
44 
39 1 Venture analysis I Opportunitv vs. resources 1 4.33 1 I 4 1 0.5 1 4 1 5 1 ... it is an A-rated opportunitv? I 
Corporate citizenship 
Corporate citizenship 
Corporate citizenship 
Corporate citizenship 
Corporate citizenship 
. . 
BEE credentials 
BEE credentials 
Contribution to the community 
Contribution to the community 
Industly-specific laws of the 
3,89 
3,11 
2,89 
3,67 
4.33 
2,89 
4 
4 
2 
4 
5 
0.9 
1,4 
1,4 
1,3 
1 .o 
4 
2 
2 
4 
4 
4 
4 
4 
4 
5 
. . 
... a significant portion of the ownership will go to 
previously disadvantaged communities? 
... the venture has no BEE credentials? 
... the venture will create many jobs? 
... the venture will not create any jobs? 
... the venture is in compliance with all the laws of the