Early-Stage Investors’ Criteria and New Venture Financial Performance: Are They Related?

Abstract

In this study, we examine whether there is a relationship between the three key espoused criteria that early-stage investors use for evaluating new venture opportunities (the entrepreneurial team, the market potential and the product/service) and subsequent new venture performance. We test this with a sample of 55 new ventures that were evaluated by a group of angel investors during 2010-11, as they entered the business angel network evaluation process, and public financial information about these ventures that was collected in 2012. Our results suggest that investors’ most common criteria for picking new venture opportunities, with the exception of founder team assessments, are not very predictive of future venture performance. Our study contributes to the long-standing debate on what are the critical dimensions that investors should pay attention to when evaluating opportunities and, more generally, to the under-researched topic of what drives early-stage investment performance, at least at the pre-investment and deal evaluation stages.