Intuition in venture capital decisions: An exploratory study using a new technique

Abstract

Even though the formal venture capital industry is a major source of financing, particularly second- and third-stage financing, some of the aspects of the investment decision have been little researched. One aspect in particular is the nature and extent of intuitive, “personal chemistry” or “gut feel” decisions involved; these are frequently mentioned as important by venture capitalists themselves, but have been little researched by workers in the field.In order to develop an understanding of intuition, this study employed a unique technique—the repertory grid—drawn from personal construct psychology. Using this technique, the ways in which venture capitalists construe (think about or ascribe personal meaning to) investment proposals were identified in a series of in-depth interviews.The results indicate that investment decision constructs can be grouped into three areas—management, unique opportunity and appropriate return, the first two areas involving the largest number of constructs reflecting such concerns as the experience of the principal, the personality and background of the principal, the characteristics of the management team, the “interpersonal chemistry” involved and a preference for a pragmatic rather than creative entrepreneur. Principal component analyses indicate the relationships between these concerns and reveal relatively low cognitive complexity: essentially, just one or two major areas of emphasis predominate in each venture capitalist's thinking.Notwithstanding these general trends across the venture capitalists studied, cluster analysis showed that each venture capitalist had his own way of structuring the institutions involved in an investment decision. These findings suggest that individuals seeking venture capital might need to adjust their approach to different venture capitalists, recognizing the diversity involved.