Streletzki & Schulte - 2013 - Ventur. Cap. - Which Venture Capital Selection Criteria

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Which venture capital selection criteria

distinguish high-flyer investments?
a a
Jan-Georg Streletzki & Reinhard Schulte
a
Department of Entrepreneurship and Start-up Management,
Leuphana University of Lueneburg, Germany
Published online: 01 Oct 2012.
To cite this article: Jan-Georg Streletzki & Reinhard Schulte (2013) Which venture capital
selection criteria distinguish high-flyer investments?, Venture Capital: An International Journal of
Entrepreneurial Finance, 15:1, 29-52, DOI: 10.1080/13691066.2012.724232
To link to this article: http://dx.doi.org/10.1080/13691066.2012.724232
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Venture Capital,
Venture Capital 2013
2012, 1–24,
Vol. 15, iFirst
No. 1, article
29–52, http://dx.doi.org/10.1080/13691066.2012.724232
v
Which Venture c
Capital s
Selection c
Criteria d
Distinguish h f
High-Flyer
i
Investments?
Jan-Georg Streletzki* and Reinhard Schulte
Department of Entrepreneurship and Start-up Management, Leuphana University of Lueneburg,

Germany
(Final version received 1 August 2012)
Downloaded by [University of Glasgow] at 12:26 30 August 2013
This study is based on an analysis of 64 ventures that were funded by German

Venture Capital (VC) firms in order to identify VC selection criteria that
distinguish non-high-flyer exits from high-flyer exits (exits that returned more
than five times the VC’s first-round money invested). Based on highly sensitive
data, which are the venture’s first-round business plan and the VC’s return rate
of the particular venture at exit, three high-flyer predictors were identified:
company, product and market related. Logistic regression and discrimination
analysis revealed that ventures with the following characteristics have the best
chance of generating a VC high-flyer exit: targeting the business-to-customers
market, being location in a metropolitan cluster and close to the lead investor,
raising VC financed prior to the proof of concept level and having strategic
partners raising the first round of VC investment. Ventures that have spun out
from corporate institutions perform below average in terms of VC exit
performance.
Keywords: venture capital; selection criteria; new venture performance; high flyer;
exit success
Introduction
Venture capital (VC) firms buy stakes in promising young ventures hoping to
establish successful companies, high flyers, that return high multiples of the invested
money. VC firms therefore need to be able to identify firms that become high flyers at
a very early stage, when in many cases those ventures do not have any sales and few
if any assets. To lower their risk, VC firms intensively monitor possible investments
(Davila, Fostera and Guptab 2003; Hellmann and Puri 2002; Gorman and Sahlman
1989) and use their own selection criteria (Dautzenberg and Reger 2010; Petty and
Gruber 2009; Zacharakis and Meyer 2000; MacMillan, Siegel and Subba Narasimha
1985; Tyebjee and Bruno 1984). Young investments are supposed to grow rapidly
and provide a good return when exited by VC firms. However, this is generally not
the case: more than half of all VC investments do not even return the money invested
(Nahata 2008; Mason and Harrison 2002; Ruhnka, Feldman and Dean 1992). They
fail to generate sufficient sales and run out of money or, less dramatically, simply do
not meet the high expectations of their VC investors who sell them at a loss. The
*Corresponding author. Email: streletzki@uni.leuphana.de
ISSN
© 20131369-1066 print/ISSN 1464-5343 online
Taylor & Francis
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230 J.-G.Streletzki
J.-G. Streletzki and R.
R.Schulte
Schulte
aim of this study is to identify those VC firm selection criteria that are related to
high-flyer exits by examining the common selection criteria that distinguish high-
flyer from non-high-flyer exits.
High flyers are only a small fraction of all VC firm investments but are
responsible for most of their returns (Nahata 2008). High flyers are in fact essential
for VC firms, as it is the returns from these investments that compensate for the
many write-offs VC firms usually have. Thus, VC firms without occasional high-flier
exits will fail to generate a return for their investors and will therefore eventually
disappear from the market.
It is therefore important for VC firms to know predictors of exit success. But
while success factors of young ventures have been very well examined (Chen, Zou
and Wang 2009; Song et al. 2008; Lussier and Pfeifer 2001; McDougall and Oviatt
1996), early visible success predictors of VC firms are very rarely analysed. As new
ventures contribute to growth, development and innovation within an economy,
there has been growing interest in the identification of success predictors responsible
for new venture growth and performance (Harms and Scillitoe 2010; Wennekers and
Thurik 1999). New technology-based ventures, in particular, have attracted the
attention of researchers because they are thought to be crucial for further
technological development and innovative progress and, hence, for substantial
economic development (Mason and Harrison 2004). While work in this field
concentrates mainly on the perspective of the firm or the economy, there is
comparatively little research on the factors making for the success of VC firms who
are one of the main financiers of technology ventures.
The selection criteria of VC firms have been thoroughly examined (Dautzenberg
and Reger 2010; Petty and Gruber 2009; Brettel 2002; Zacharakis and Meyer 2000;
MacMillan, Siegel and Subba Narasimha 1985; Tyebjee and Bruno 1984) but their
link to actual VC exit performance is missing. Scholars value VC managers as
experts and interpret their selection criteria as predictors of new venture
performance. But as far as we know, there has been no study that demonstrates
which selection criteria are actually linked to new venture growth and exit
performance. This study is intended to fill this gap in the research.
Providing equity gives VC firms a vital role in the development of technology-
based ventures and for the realization of future development. In addition, VC firms
add value to their portfolio companies during the time of engagement by supporting
the management team with their experiences and networks (Sapienza, Manigart and
Vermeir 1996). It has been shown that young ventures that are funded by VC firms
have higher survival rates than ventures that are not (Inderst and Mueller 2009;
Audretsch and Lehmann 2004; Manigart, Baeyens and Van Hyfte 2002; Kunkel and
Hofer 1990).
However, the high failure rate and the low high-flyer rate indicate that there is
still room for optimising investment decisions. This study contributes to the
optimisation of VC performance by analysing possible predictors of high-flyer exit
performance based on common VC firm selection criteria and the decision trade-
offs that come with it. The focus of this study is on the predictors that are related
to the company, the product and the market. The founder characteristics are not
analysed nor are internal success predictors of a VC firms itself like VC
management or fund size (Zarutskie 2010; Dimov and Murray 2008; Lange
et al. 2001). Those predictors are also relevant for success prediction but go beyond
the scope of this study.
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Venture Capital 313
By exploring the predictors that are responsible for VC high-flyer exits, the
findings of this study add value to the theoretical and practical approach of VC
success prediction. Even though statistically generated results of the past cannot
replace a VC manager’s ‘gut feeling’ (Khan 1987) about investment decisions, they
can support and optimise those experience-based decisions and therefore lead to
better exit performance.
This article proceeds as follows. In the next section, we explain different
measurements of young venture success and VC success. In addition, we present the
state-of-the-art of theoretical and empirical findings regarding VC firm selection
criteria, decision trade-offs and subsequent venture performance to identify potential
predictors of high-flyer exits. In the following sections, we describe our sample, the
variables and the methodology of our analysis, which is then followed by the results
of the analysis. Using logistic regression, we identify selection criteria responsible for
high-flyer exits and demonstrate their ability to distinguish high flyers from non-high
flyers by using discrimination analysis. A discussion of the main findings and their
implications for theory and practice conclude this article.
Review of prior research

High-flyer exits
High-flyer exits, also known as ‘VC gazelles’ or ‘VC home runs’, have been examined
by only a few scholars (Dimov and Shepherd 2005; Zacharakis and Meyer 2000). As
their names indicate, these are those portfolio companies that clearly outperform
other portfolio companies in terms of exit performance but represent only a small
minority of all VC investments (Cochrane 2005; Manigart et al. 2002). However, in
most cases, VC firms only invest in young companies when they see the chance to
create a new high flyer.
High-flyer exits are in general those exits that multiply the VC invested by a
factor greater than 5 or 10 (Cochrane 2005; Berlin 1998; Zider 1998). Due to the lack
of internal VC data, many researchers have to rely on other measures and equate
high-flyer exits with initial public offerings (IPOs). IPOs are a very common VC
performance measure as venture-backed companies exiting via an IPO provide a
significantly higher return on investment than all other kinds of exits (Giot and
Schwienbacher 2007; Cumming and MacIntosh 2003). Unfortunately, this is not a
fully satisfactory approach when analysing high-flyer exits. On the one hand, there
are occasional IPOs that do not return invested money on a high-flyer level; on the
other hand, other exit channels like trade sales sometimes generate a high-flyer exit
(Gompers 1995).
Thus, sophisticated studies on VC exit performance use the internal rate of return
as success variable of VC investments. The internal rate of return is a special return
on the investment rate, expressing the annualized effective compounded return rate
that can be earned on the invested capital (Feibel 2003). As VC firms do not usually
make this data public, only a small number of studies can rely on the internal rate of
return to measure VC exit performance (Bates and Bradford 2007; Nowak, Knigge
and Schmidt 2004; Schefczyk and Gerpott 2001; Roure and Keeley 1990).
In this study, we will investigate the pre-funding selection criteria that are
responsible for VC high-flyer exits, based on the internal rate of return of eight
German VC firms. We therefore define high-flyer exits as those exits that return at
least five times the initial VC invested.
432 J.-G.
J.-G.Streletzki R.Schulte
Streletzki and R. Schulte
VC firm selection criteria

Due to uncertainty of the markets and information asymmetries between investors
and founders, VC managers must rely on established selection criteria when
evaluating possible investments. Those criteria are meant to support the evaluation
process of VC managers in order to predict future performance of the investment
opportunity. Based on the principal-agent theory (Eisenhardt 1989), VC firm
selection criteria can be interpreted as screening tools that VC managers use to avoid
principal-agent problems such as adverse selection to the best possible extent. At the
same time, founder teams try to send credible signals to potential investors in order
to reduce asymmetric information and secure VC (Janney and Folta 2003; Morris
1987). Researchers have identified several VC firm selection criteria to understand
VC managers’ evaluation procedure (Petty and Gruber 2009; Brettel 2002; Knight
1994; Hall and Hofer 1993; MacMillan, Siegel and Subba Narasimha 1985). In many
cases, possible selection criteria differ from one VC firm to another based on each
firm’s individual risk profile. Overall, VC firm selection criteria can be split into five
groups: the founder team, the company, the product, the market and the financial
criteria. Many studies only concentrate on certain areas or industries when analysing
VC firm selection criteria (Munari and Toschi 2011; Franke et al. 2008; Busenitz,
Fiet and Moesel 2005; Baum and Silverman 2004). Most of the studies focus on
team-related selection criteria as they are believed to have the biggest impact on VC
firms’ decision making (Brettel 2002). Some international studies not only examine
the differences in selection criteria between countries but also find similarities in
approach (Zacharakis, McMullen, Shepherd 2007; Brettel 2002; Zutshi et al. 1999).
Other studies look at the influence that VC firm characteristics have on selection
criteria and find that the experience of the VC managers especially influences the way
they select new portfolio companies (Knockaert, Clarysse and Wright 2010;
Matusik, George and Heeley 2008; Shepherd, Ettenson and Crouch 2000).
To fill the research gap and thereby complement the findings of other studies, we
gathered data on non-founder characteristics in this study. Of the non-founder
selection criteria identified, we chose to examine only those criteria that represent
clear facts and are not influenced by the founders’ subjective exposure in the business
plan. Therefore, we excluded predictors like financial or market assumptions. The
selection criteria we analyze in what follows are related to the company, the product
and the market of the venture and represent a trade-off between risk and chances of
success, which we analyze with special attention to high-flyer exits.
Stage
Even though VC firms invest in young companies, there is still a difference in the
development stage of the portfolio company when it is initially funded. While some
VC firms specialize in later-stage investments, others invest at a very early stage,
often even before the portfolio company has been founded. Selection criteria
depend on the VC firm. When investing in very young companies, the shares are
usually less expensive to get but the risk is very high because of the high degree of
uncertainty at that point in time. Therefore, the risk profile of those VC firms that
invest at the early stage is different from that of VC firms that invest at a later
stage. When companies are already trading or even have provided a proof of
concept, the risk of failure is smaller but shares are usually more expensive than at
an earlier stage.
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Venture Capital 335
While studies, using exit survival as a measure of performance, find a positive

correlation between age and performance (Bartkus 2004; Engel 2004; Sykes 1986),
studies on IPO probability find a negative correlation (Zhang 2009). Hence, start-ups
that have access to VC at a younger age are more likely to complete an IPO. This
finding can be considered to confirm the high risk of very young ventures that often
fail, but, when they are successful, outperform their surviving counterparts in terms
of IPO probability.
Location (regional networks and clusters)

Many VC firms use selection criteria that are related to the location of the potential
portfolio company. VC firms prefer to invest in ventures that are close by and/or
located in a particular cluster (Brettel 2002; Muzyka, Birley and Leleux 1996;
Tyebjee and Bruno 1984). Both criteria are believed to have a positive impact on the
portfolio of company’s development. Researchers explain the positive effect of

cluster-based ventures on higher knowledge spill over and better network effects
within those clusters (Gilbert, McDougall and Audretsch 2008; Stuart and Sorenson
2003). The advantage of a short distance between VC firm and portfolio company is
explained by the lower costs of pre-investment screening as well as the ease of post-
investment coaching and control (Chen et al. 2010). The disadvantage of a locational
focus is the limited number of choices and – especially in certain clusters – more
intense competition among VC firms to make investments.
Empirical studies of VC investments predominantly find a positive influence of
cluster-based portfolio companies on exit performance. This is true for metropolitan
clusters (Bartkus 2004), entrepreneurial clusters (Zhang 2009; Giot and Schwienba-
cher 2007), R&D clusters (Cumming and Dai 2009) and VC firm clusters (Chen et al.
2010). Moreover, most cluster-based new technology-based ventures have been
found to outperform non-cluster-based ventures (Folta, Cooper and Baik 2006;
Stuart and Sorenson 2003; DeCarolis and Deeds 1999).
Regarding the distance between VC firm and portfolio company, studies are not
as numerous as those on cluster-based ventures because this is a VC-specific issue.
Most studies find that a short distance between VC firms and their portfolio
companies contributes positively to exit performance (Chen et al. 2010; Cumming
and Dai 2009). Bengtsson and Ravid (2009) show that VC firms are already aware of
the distance risk of their portfolio companies by using more high-powered
investment contracts as the distance increases.
Spin-off
Besides the general evolution of new businesses, ventures can spin out of various
institutions. Often companies and universities produce spin-offs and function as
parent institutions that support the development of the new venture. From a VC
firm’s point of view, this special set-up has both advantages and disadvantages. On
the one side, some VC firms focus on spin-off investments as they value the
intellectual property of those kind of companies. This is mainly true for
biotechnology companies (Zhang 2009; Baum and Silverman 2004). On the other
hand, most VC firms try to avoid investing in corporate or academic spin-offs,
fearing the bureaucratic environment of big companies and universities (Munari and
Toschi 2011; Wright et al. 2006). For academic spin-offs, in particular, it is difficult
634 J.-G.
to obtain external VC because of a higher degree of uncertainty and potential for

information asymmetries (Shane 2004).
Although parent institutions provide a support system, they can also act as a
decelerator on the venture’s development due to inflexible structures. It seems that
technology-driven businesses are in special need of a flexible environment if they are
to grow fast. Those findings have been confirmed by empirical studies on VC exit
(Zhang 2009; Baum and Silverman 2004).
Partnerships
Besides cooperation with parent institutions, there is also the possibility of general
partnerships that might foster the development of young ventures. In many cases,
partnerships are established with other companies in the same industry (down-
stream, upstream or horizontal alliances) or with single persons who have special
technical, financial, legal or start-up expertise. Generally, the existence of partner-

ships and networks has been found to contribute to venture performance (Alvarez
and Barney 2001; Chang 2004; Rosenkopf and Schilling 2007; Stuart and Sorenson
2007; Walter, Auer and Ritter 2006). Main performance drivers in terms of
cooperation advantages are lower research and development expenses and structural
efficiency (George, Zahra and Wood 2002) as well as better learning effects (Zahra,
Ireland and Hitt 2000).
For VC firms, partnerships are often interpreted as quality signals as they open
doors to valuable resources and show that the venture has earned positive
evaluations from other knowledgeable actors (Baum and Silverman 2004). Partner-
ships therefore help to avoid liabilities of newness and smallness and enhance the
chance of early portfolio company performance. Those advantages in most cases
more than compensate for the disadvantage of venture partnerships for VCs. In their
empirical study of VC exit performance, Baum and Silverman (2004) find that
upstream and horizontal alliances of biotechnology companies positively influence
exit performance, while downstream alliances have a negative effect. In terms of new
technology-based venture performance, most researchers have confirmed the positive
impact of partnerships on performance (George, Zahra and Wood 2002; Zahra,
Ireland and Hitt 2000; Miles, Preece and Baetz 1999; McGee, Dowling and
Megginson 1995).
Patents
In many cases, the only real assets of young companies consist of intellectual
property such as patents. They help potential portfolio companies to signal their
innovative capabilities when being evaluated by VC firms. Concerning new venture
performance, many authors underline the importance of effective patent protection
to avoid competitive technology imitation, thus optimising future development of
the venture (Schmidt and Riesenhuber 2009; Bessler and Bittelmeyer 2008; Ernst and
Omland 2003; Shane 2001a; Shane 2001b).
Patents held by new ventures have been shown to improve their ability to attract
VC (Nadeau 2010; Haeussler, Harhoff and Mueller 2009; Mann 2005). MacMillan,
Siegel and Subba Narasimha (1985) showed that the most important VC firm
selection criteria are related to the product or service is the existence of patents.
Biotechnology ventures that own patents in particular are more likely to obtain VC
Venture Capital
Venture Capital 357
than are their counterparts that own no patents (Baum and Silverman 2004; Lerner
1994). There have been few studies on the influence of patents on VC exit
performance. All in all, they find a slightly positive effect on exit performance (Cao
and Hsu 2010; Mann and Sager 2007; Baum and Silverman 2004).
Proof of concept
Another VC-specific issue deals with the question whether young ventures already
have a functioning prototype (product) or a proof of their business concept (service)
at the time of initial investment. VC firms argue that the degree to which the
technology of a portfolio company is developed at the time of initial investment
predicts later exit success as it lowers the risk of failure (MacMillan, Zemann and
Subbanarasimha 1987). At the same time, it lowers the chances of a high exit
multiple as shares are generally more expensive after the proof of prototype/concept.
Brettel (2002) identified a functioning prototype as the most important product-

related selection criteria of VC firms.
A couple of empirical studies on VC exit performance confirm these opinions.
Sykes (1986) found that there is a significant positive correlation between the initial
venture technical status of a VC-backed venture and its exit performance. Hence,
companies that are already in the production stage when getting their first funding
outperform their less-developed counterparts that are still in the development stage.
By interviewing VC firms about one of their most successful ventures and one of the
least successful or failed ventures, Kakati (2003) found a significant positive
difference between ventures that have developed their product to a functioning
prototype and those that have not.
Diversity
Some VC firms also select their portfolio companies based on the diversity of
products or services they offer (Hall and Hofer 1993). A venture’s business model
can be product based (tangible offering), service based (intangible offering) or a
combination of both. Moreover, within these three categories, products or services
can be specialised or varied. In terms of VC exit performance, Sandberg and Hofer
(1987) found a broad market scope to be significantly superior to focused strategies
by portfolio companies. Generally, it is believed that product-based business models
outperform service-based business models as in most cases they have a greater
development advantage. Thus, it is harder for competitors to adapt or copy the
business model and enter the same market (Li and Atuahene-Gima 2001; Dahlstrand
1997). Service-based businesses are in most cases less costly to develop and therefore
easier to bring to the market. Overall, however, the development advantage seems to
outweigh the ‘cheap to the market’ advantage (Morris, Schindehutte and Allen
2005).
Concerning the variety of products or services offered, most researchers found
ventures with a greater variety of products or services to outperform ventures with a
smaller variety (Zott and Amit 2008). Having more than one product or service
lowers the risk of failure and presents greater scope for growth potential. However,
ventures have to be careful not to lose sight of their core business, especially when
they are still in the development stage. Wally and Baum (1994) found that product
diversity leads to comparable greater sales as it increases a venture’s competitiveness
836 J.-G.
in creating customer value and meeting differentiated customer needs. Chen, Zou
and Wang (2009) arrived at similar results, empirically showing a positive correlation
between product or service diversity and new technology-based venture
performance.
Segment
The market segment that a venture is targeting presents another trade-off between
opportunity and risk (Short et al. 2009). A new venture can either place its focus on
the business-to-business (b2b) or the business-to-customers (b2c) market. Muzyka,
Birley and Leleux (1996) showed that the preference of European VC firms for either
b2b or b2c portfolio companies is based on their own experiences. In other words,
they prefer market segments that they already know well (Brettel 2002).
Entering the b2b market, in most cases, implies a long time to market as the
barriers of entry are higher than that to the b2c market. At the same time, this
implies an advantage over competitors by the time being in the market. The b2c
market is much more volatile, so the risk of failure is greater than it is for ventures
targeting the b2b market. Meanwhile, the chances are also greater as b2c markets
tend to be larger and it is easier to scale up the business over time.
Strategy
The way of entering a market might influence the later performance of a venture.
The main distinction can be made between ventures that enter the market with a
pioneer strategy and those with an imitating strategy. A pioneer is the first company
to introduce a product or technology to a market. Pioneering is among the most
widely recognized dimensions of technology strategy (Porter 1985). Moreover,
pioneer strategy represents a firm’s propensity to engage in novelty, experimentation
and R&D activities. Through innovations, firms differentiate themselves and achieve
competitive advantages (Acs and Audretsch 2005; Zahra and Bogner 2000). This
creates a first-mover advantage that makes it possible to gain a high market share.
However, the risk of failure with a first-mover strategy is high as new markets can be
quite uncertain. Surprisingly, most researchers on VC firm selection criteria find
ventures that target established markets to attract VC more easily than their
innovative counterparts (Brettel 2002, MacMillan, Siegel and Subba Narasimha
1985). It seems that VC firms want to avoid the risk of failure of portfolio companies
that target new uncertain markets.
In terms of exit performance, novelty ventures are found to outperform their
imitation counterparts. Sandberg and Hofer (1987) find a positive correlation
between pioneer strategy and venture success. By interviewing VC firms about one of
their most successful ventures and then on one of the least successful or failed
ventures, Kakati (2003) identified a significant positive difference between ventures
with and without a pioneer strategy (Table 1).
Methodology
Sample
To test the proposed relationships, a sample of highly sensitive data was needed. We
asked German VC firms for permission to analyze their first-round business plans of
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Table 1. Expected high-flyer predictors of selection criteria based on prior research.
þ 7
Stage Lower risk of failure x Shares are cheaper
Cluster Knowledge spillover, x War of talents, more
network effects choices
Distance Lower screening and x More choices
controlling costs
Academic spin-off Support system x bureaucratic environment,
extra shareholder
Corporate spin-off Support system x bureaucratic environment,
extra shareholder
Strategic partner Support, trust x extra shareholder
Patent competition advantage x shares are cheaper
Prototype Lower risk of failure x Shares are cheaper
Diversity (product) Development advantage x cheap to market
Diversity (single) focus x Diversity

Segment (b2c) Market size x barriers of entry
Pioneer strategy first mover x Lower risk
Notes: Different selection criteria represent different trade-offs between chances and risks. Based on results
of prior research we expect those relationships between high-flyer exits and variables/criteria.
former investee companies and state their exit multiple for each of those investments.
This procedure included quite a few challenges. We asked the 30 biggest German VC
firms in terms of track record quantity that still play an active role on the market.
Eight of those firms agreed to take part in this study, supplying us with 64 first-round
business plans of former portfolio companies that have exited between 2000 and
2010. All portfolio companies were either from the telecommunication, information
technology, microsystems technology or biotechnology sector. Their founder teams
consisted of 1–7 founders (average, 2.9). The VC firm’s holding period of the
ventures was between 0.7 and 10.8 years (average, 4.6).
As nearly all of the VC firms had non-disclosure agreements with the founders,
an effort was made to get the permission of the founders and to make every plan
anonymous. Obviously, those eight VC firms had done more than 64 exits between
2000 and 2010 but not all business plans had been archived or a proper business plan
never existed before first-round financing. These circumstances, as well as the fact
that some VC firms decided not to provide us with their data, might lead to a
selection or non-response bias of analysed business plans. However, reports on the
German VC market indicate that our sample is representative, at least in terms of
failure rates. They show that about a third to a quarter of all German VC
investments had to be written off between 2000 and 2010 (FHP 2011, BVK 2011).
Our sample represents an insolvency rate of 23.4% (Table 2), which is just below
those findings. So, in contrast to many other performance studies, our results do not
have a survivor bias as a result of first-round data analysis.
Measurements
Dependent variable
We built one dependent variable to separate the 64 exits into two groups – high flyers
and non-high flyers. All exits that returned more than five times the VC’s first-round
10
38 J.-G.Streletzki
R.Schulte
Schulte
Table 2. High-flyer and non-high-fly exit channels.
High-flyer
Exit channel 0 1 Total
Trade sale 27 1 28
IPO 2 8 10
Buy back 4 0 4
Insolvency 15 0 15
Secondary 5 1 6
Other 1 0 1
Total 54 10 64
money invested in were defined as high flyer. Ten of the 64 exits were classified as
high flyers, while 54 ventures reached a lower exit multiple than five. Eight of the
high flyers exited via an IPO, while of the non-high flyers only two companies exited
via IPO (Table 2).
Independent variables
As discussed before, we identified selection criteria that are related to the company,
the product and the market of a venture are based on facts rather than on the
planning abilities of the founders. Based on those criteria, we built the following
independent variables (Table 3), which we will examine for their effect on high-flyer
exit performance in order to find out which of those selection criteria are actually
responsible for high-flyer exits.
Control variables
We included controls for two variables that might also influence the performance of
a VC exit. First, an industry dummy (industry) was conducted with all life science
ventures, coded 1. It has been shown that the life science investments perform
differently and also have different risk profiles (Chen, Zou and Wang; Stuart and
Abetti 1987). Likewise, we control for different exit years as it has been shown that
average exit performance changes over years depending on multiple market
influences (Gompers et al. 2008; Nowak, Knigge and Schmidt 2004; Peng 2001;
Bygrave and Timmons 1991). In this regard, Bygrave and Timmons (1991) noted
that ‘hot IPO markets are by far the most important cause of peaks in venture capital
returns’ (p. 159). Therefore, a dummy variable exit year was conducted with the
years 2000 and 2005 until 2008, coded 1. Different studies found these years to
outperform the remaining years between 2000 and 2010 in Germany for cyclical
reasons (BVK 2011; FHP 2011).
Statistical method
In addition to the descriptive results in our analysis (see Tables 4 and 5), we chose
logistic regression to identify significant predictors of high-flyer exits based on the
identified selection criteria. Logistic regression is used for prediction of the
probability of certain events occurring. It is a qualified method to analyze predictors
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Table 3. Independent variables.
Variables Description
Company
Stage One for portfolio companies that had already been founded at the
time of first-round application, otherwise zero.
Cluster One for portfolio companies based in a metropolitan region where
more than one million people live in, otherwise zero. In Germany,
those regions are Berlin, Hamburg, Munich and Cologne.
Distance One if at least one office of the first-round lead investor is not more
than 50 km away from the portfolio company’s main office,
otherwise zero.
Academic spin-off One for portfolio companies that spun off from academic
institutions, otherwise zero.
Corporate spin-off One for portfolio companies that spun off from corporate
institutions, otherwise zero.
Strategic partner The number of strategic partners (downstream, upstream or

horizontal alliances as well as specialists such as lawyers) the
venture has at the time of first-round application.
Product
Patent One for portfolio companies that have at least one patent licensed at
the time of first-round application, otherwise zero.
Prototype One for portfolio companies that already have a product or service
that is in or behind the prototype/proof of concept stage at the
time of first-round application, otherwise zero.
Diversity (product) One for portfolio companies with a product-based business model,
otherwise zero.
Diversity (single) One for portfolio companies with a business model that is based on a
single product or service, otherwise zero.
Market
Segment (b2c) One for portfolio companies that target only the customer market at
the time of first-round application, otherwise zero.
Pioneer Strategy One for portfolio companies whose market entrance strategy at first-
round application is a pioneer strategy, otherwise zero.
Table 4. Descriptive sample results.
1 n-HF HF
Stage 0.70 0.76 0.4
Cluster 0.59 0.52 1.0
Distance 0.38 0.31 0.7
Academic spin-off 0.17 0.17 0.2
Corporate spin-off 0.27 0.29 0.1
Strategic partner (average) 2.52 2.5 4.2
Patent 0.38 0.37 0.4
Prototype 0.86 0.91 0.6
Diversity (product) 0.66 0.67 0.6
Diversity (single) 0.39 0.39 0.4
Segment (b2c) 0.31 0.24 0.7
Pioneer strategy 0.77 0.74 0.9
Industry 0.31 0.28 0.5
Exit year 0.61 0.37 0.5
Notes: Our sample consists of 64 business plans from eight VC firms. This table presents the descriptive
sample results. For example, 70% of all ventures received VC after they were founded. Of the high-flyer
ventures, only 40% received VC after they were founded, compared to 76% of the non-high-flyer ventures.
12
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Table 5. Correlations among the variables.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
1. High-flyer exit 1.000

J.-G.
2. Industry 0.097 1.000

3. Exit year 0.158 70.082 1.000
4. Stage (seed) 70.286** 0.163 70.251** 1.000
5. Cluster 0.356*** 0.104 0.141 70.120 1.000
6. Distance 0.289** 70.060 0.041 70.133 0.378*** 1.000
J.-G.Streletzki
7. Academic spin-off 0.032 0.211* 0.145 0.296** 0.040 0.160 1.000

8. Corporate spin-off 70.196 0.035 0.145 0.024 70.045 70.182 70.208 1.000
9. Strategic partner 0.012 0.151 0.011 0.294** 0.055 70.242* 0.150 0.190 1.000
10. Patent 0.022 0.421*** 70.157 0.080 0.115 70.067 0.160 0.246* 0.224* 1.000
Streletzki and R.
11. Prototype 70.321** 0.283** 70.320** 0.623*** 0.152 70.244* 0.184 0.184 0.268** 0.128 1.000
12. Diversity (product) 70.051 0.366*** 70.095 0.178 0.071 70.187 0.155 0.068 0.130 0.288** 0.180 1.000
13. Diversity (single) 0.008 70.287** 0.147 70.041 70.055 0.108 70.110 70.110 70.153 70.289** 70.045 70.162 1.000
14. Segment (b2c) 0.360*** 0.175 70.056 70.152 0.215* 0.243* 70.128 70.128 0.083 0.104 70.309** 0.133 70.056 1.000
R.Schulte
15. Pioneer strategy 0.137 0.308** 70.162 0.044 70.007 70.029 0.154 70.139 0.091 0.124 70.012 70.012 70.313** 0.055 1.000
Schulte
n ¼ 64, ***p 5 0.01; **p 5 0.05; *p 5 0.1.

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of a dichotomic-dependent variable (0 ¼ failure/1 ¼ success) by modeling the log

probability that the dependent variable is different from 0 (Kohler and Kreuter 2008;
Hosmer and Lemeshow 2000). In the following, we test the three models – company,
product and market – with logistic regression to find out how they influence later exit
performance and which of their selection criteria are responsible for high-flyer exit
prediction.
To test for multicollinearity among the independent variables, we calculated
variance inflation factors (VIF) (Hair et al. 2006; Kleinbaum et al. 1998). For all
three single models, we observed VIF levels that were lesser than 4, so there was no
cause for concern about multicollinearity as it was much smaller than the critical
VIF of 10.
Analysis and results

Company-related results
To provide an initial impression of the results, correlations of company-related
selection criteria and high-flyer exit performance are presented in Table 5. The
correlations indicate that young ventures that were not even founded at the time of
first-round application have a significantly higher chance to become a high flyer than
do their older counterparts. In terms of geographical predictors, the results show
that cluster-based ventures and ventures located close to their lead investors also
have a higher chance of becoming high flyers. None of the spin-off variables show
any significant influence on exit performance but while corporate spin-offs seem to
have a negative influence on exit performance, academic spin-offs have a slightly
positive influence. The number of strategic partners does not show any significant
influence on exit performance.
To arrive at a deeper insight into the results of company-related variables on exit
performance, we conducted logistic regression analysis, which is presented in Table 6
(model 1). All company-related selection criteria as well as the two-control variables
were used to build a company model.
We found that VC firms often invest only in companies that have reached a
certain stage of development. In particular, VC firms make a distinction between
companies at the seed and later stages. The company model shows that ventures that
were not even founded at the time of first-round application have a significantly
higher chance of becoming a high-flyer exit (p 5 0.05). Likewise, portfolio com-
panies based within 50 km of their first-round lead investor outperform
ventures that are not in terms of high-flyer exit performance at a p 5 0.05 level of
significance. For those companies, the odds of becoming a high-flyer exit are more
than 20 times greater than the odds for portfolio companies that are located further
away.
Regarding the relationship of cluster-based portfolio companies on high-flyer
exit performance, we have to rely on the bivariate findings as all high flyers are
cluster based and therefore the cluster variable was omitted from the regression
model. We take those findings as support for the cluster selection criteria as in our
sample non-cluster-based ventures predict non-high-flyer exits perfectly.
As discussed earlier, research on start-up performance suggests that ventures that
spun off from academic or corporate institutions both have a lower chance of
becoming a VC high flyer. While this is true for corporate spin-offs with an odds
ratio of 0.03 at a p 5 0.05 level of significance, we found no significant results for
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R.Schulte
Schulte
Table 6. Non-founder-related logit models of high-fly-exits.
Model (1) Model (2) Model (3)

Company Product Market
Industry 35.301** 21.834** 2.0140
(54.32) (27.287) (1.697)
Exit Year 3.668 0.959 3.092
(3.897) (0.906) (2.602)
Stage 0.017**
(0.029)
Distance 20.586**
(26.176)
Academic spin-off 0.763
(1.045)
Corporate spin-off 0.0289**
(0.049)
Strategic partner 1.404**

(0.24)
Patent 0.780
(0.738)
Prototype 0.034***
(0.044)
Diversity (product) 0.5240
(0.495)
Diversity (single) 1.9850
(1.759)
Segment (b2c) 7.738**
(6.24)
Pioneer Strategy 2.9900
(3.642)
Pseudo R2 0.4273 0.2312 0.1983
Sig 0.0013 0.0459 0.0266
Observations 64 64 64
Notes: Standard errors in parentheses. Odds ratios statistically significant at ***p 5 0.01, **p 5 0.05,
*p 5 0.1. Dependent variable: high-flyer exits.
academic spin-offs. Concerning strategic partners, we find the company model to

support this selection criterion by stating a significant positive relationship between
the number of strategic partners at the time of first-round application and the chance
to become a VC high flyer with an odds ratio of 1.4.
On the whole, we find that most of the company-related selection criteria have a
significant impact on high-flyer exits. Thus, the company model is significant at a
p 5 0.01 level of significance resulting in a pseudo R2 of 0.4273 even though the
cluster variable is omitted from the analysis. These findings indicate that company-
related selection criteria of VC firms should be taken seriously as they predict high-
flyer exits to a large extent.
Product-related results
The correlation matrix for product-related success predictors of VC exit
performance (Table 5) only finds the existence of a prototype/proof of concept to
have a significant influence on high-flyer exit performance. Surprisingly, a negative
correlation stating that for ventures without a prototype/proof of concept at first-
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round application, the odds of becoming a high-flyer exit are nearly 30 times greater
than the odds for portfolio companies with a prototype/proof of concept. The
existence of patents has no significant influence on exit performance, nor does a
venture’s business model that is based on product or a single product or service.
Surprisingly, ventures with a product-based business model seem to achieve an exit
performance that is below average. Again, regression analysis is conducted to test the
relationships among product-related selection criteria (Table 6, model 2).
VC firms often predict that portfolio companies have a higher chance of
succeeding when holding a patent at the time of first-round application. In this
regard, the product model finds a positive but insignificant correlation. Holding a
patent therefore has no significant influence on later high-flyer exits. An unexpected
finding is that model 2 in Table 6 shows a significant negative relationship between
the proof of concept and later high-flyer exits. Therefore, VC firms should invest in
young companies that do not even have a proof of concept in order to increase their
chance of generating a high-flyer exit. Once again, this finding supports the argument
from the company-based selection criteria that seed investments – even before the
proof of concept milestone – foster high-flyer exit performance. One might attribute
this to the higher risk of investing at the earliest stage of company development that
implies not only a higher chance of generating a high-flyer exit but also a higher risk
of generating a total loss. We checked back with our data but found no such
relationship among the non-high-flyer exits. Non-high-flyer portfolio companies that
had no proof of concept at the time of initial funding were not overrepresented in the
group of exits that did not even return the money invested.
In terms of selection criteria that focus on the diversity of portfolio companies,
we find no significant influence on the product vs. service side or on the single vs.
many products or services side. Therefore, VC firms do not have to place too much
weight on the diversity of possible investments when evaluating their high-flyer
potential.
All in all, only the existence of a proof of concept at the time of first-round
application contributed significantly to later high-flyer exit performance in terms of
product-related success predictors. In contrast to the expectation of most VC firms,
however, it has a significant negative impact on exit performance.
Market-related results
Regarding market-related success predictors, the correlation results (Table 5)
indicate a positive influence of ventures based on a b2c model on high-flyer exit
performance. Entering the market via a pioneer strategy does not seem to affect
high-flyer exit performance significantly.
Regression results of market-related success predictors (Table 6, model 3) mainly
confirm the bivariate findings of Table 5. It supports the impact of b2c ventures on
high-flyer exit performance by stating a positive significant influence. Thus, ventures
that target only the b2c market generate more high-flyer exits than do b2b ventures
or ventures with a combined business approach (odds ratio of 7.74). Moreover, the
market model finds no significant relationship between high-flyer exit performance
and ventures that enter the market with a pioneer strategy.
On the whole, all three market-related success predictors show a positive
influence on exit performance, but only b2c contributes significantly to a high-flyer
exit performance. The market model is significant at the p 5 0.05 level.
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44 J.-G.
Discrimination analysis
Having identified which selection criteria influence our dichotomic-dependent
variable, we examine the differences between the two groups of exits, high flyer
and non-high flyer, from a discrimination analysis perspective. Given this objective,
discriminant analysis is a suitable statistical instrument and might lead to a deeper
understanding and confirmation of group affiliation.
The results of the multivariate regressions indicate that not only the bivariate
findings predict later exit performance but also intercorrelations of the selection
criteria have to be taken into account. Thus, we found that the proof of concept/
prototype variable was highly correlated with the stage of development variable. In
addition, the cluster variable was omitted, because it perfectly predicted non-high
flyers. Moreover, both the strategic partner variable and the corporate spin-off
variable provided significant influence on exit performance in the multivariate
regression, which they did not in bivariate correlations. With discriminant analysis,
we are able to include all variables and also observe intercorrelations of the
independent prediction variables.
According to Backhaus et al. (2006), discriminant analysis has two aims:
identification and classification. It identifies the variables that better contribute to
discriminating among groups. Moreover, based on the identified variables, it
classifies each individual to one of the groups, without knowing in advance the group
to which it pertains. In our study, we use the variables identified by regression
analysis before checking for discrimination potential and to discover which of those
variables are mainly responsible for predicting high-flyer exit performance. The
analysis produces a linear combination of success predictors that best distinguishes
high flyers from non-high flyers. Based on these results, we are able to verify the
findings by calculating the proportion of correctly classified cases.
First of all, results show a significant discriminant function at p 5 0.01 (with a
canonical correlation of 0.5397, an eigenvalue of 0.4109 and a likelihood ratio of
0.7088). In order to get an impression of the discriminating power of each selection
criterion, discriminant coefficients and loadings were examined next. While
coefficients are defined as the contribution of a variable to the discriminant function,
loadings measure the linear correlation between an independent variable (e.g.,
patenting) and the function. According to Hair et al. (2006), the use of loadings is
more appropriate as coefficients are known to be unstable. Thus, a high loading
indicates a strong association between that variable and the discriminant function.
Results of the canonical structure in Table 7 (model 1) show the most important
discriminant variables – those with a positive loading contributes positively to the
discriminant function and therefore negatively to high flyers. The selection criteria,
in descending order, are as follows: the segment (b2c), the cluster, the proof of
concept/prototype (negative), the distance and the stage of development (negative).
In line with Hair et al. (2006) who suggest that, ‘in simultaneous discriminant analysis,
any variables exhibiting loadings plus-minus 0.30 are considered significant’ (p. 119),
both corporate spin-offs (negative) and the number of strategic partners were not
found to discriminate significantly between high flyers and non-high flyers.
With a resubstitution classification table, we then tested the composed
discriminating power of this function. The purpose of this classification is to check
for the function’s ability to correctly classify the ventures into high flyers and non-
high flyers. With a very high hit ratio, it correctly classified 89.1% of the weighted
sample.
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Table 7. Discriminant analysis of exit predictors.
Model (1) Model (2)

Canonical correlation 0.540 0.703
Eigenvalue 0.411 0.974
Likelihood ratio 0.709 0.507
Significance 0.005 0.001
Structure matrix (canonical correlations)
Stage – 0.460 – 0.375
Cluster 0.590 0.350
Distance 0.470 0.512
Corporate spin-off – 0.255 – 0.214
Strategic partner 0.387 0.263
Prototype – 0.529 – 0.631
Segment (b2c) 0.602 0.801
Observations (nHF-HF) 54–10 39–5

Correctly classified 52–5 38–4
% 89.1 95.5
In light of those findings, we examined the cases that were misclassified with the
intention of optimising the discriminant function. We found that of the five high-
flyer exits, which had been misclassified by our function, four were in fact
biotechnology companies. This again supports our action in the regression part of
the analysis where we controlled for biotechnology companies within our sample. At
the same time, it provides a reason not to compare biotechnology exits with exits
from other industries. Thus, we conducted a second discriminant analysis without
the 20 biotechnology companies in our sample. As expected, the results were even
more accurate than before, with a highly discriminant function (canonical
correlation of 0.7025 (þ 0.1628), eigenvalue of 0.9741 (þ 0.5632), likelihood ratio
of 0.5066 (70.2022)) at p 5 0.001.
A change of the loadings also appeared, as can be seen in the canonical structure
in Table 7 (model 2). While the loadings of the segment (b2c), the proof of concept/
prototype, and the distance rise, the loadings of the cluster, and the stage of
development are no longer high, but still significant. Again the number of strategic
partners as well as corporate spin-offs (negative) was not found to significantly
discriminate between high flyers and non-high flyers, even though the loadings of
strategic partners were much higher than before. Consequently, the results of the
classification table are even more accurate than before with 42 of 44 cases classified
correctly by the model, resulting in a correct hit ratio of 95.5%.
Discussion and conclusion

This study indicates that there are non-founder-related selection criteria that predict
later exit performance in terms of high-flyer exits and that there are also selection
criteria that have no significant influence on later high-flyer exits. We were able to
identify high-flyer success predictors and also to explain much of their discrimina-
tory power between high flyers and non-high flyers (Table 8).
Our findings indicate that VC firms should rethink their selection criteria and
prove which ones are really responsible for high-flyer exits. Just because selection
criteria are responsible for new venture growth, it does not mean that they also
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46 J.-G.Streletzki
R.Schulte
Schulte
Table 8. Summary of the relationships among variables.
Expected Correlations Logit Discrim

Stage 7 7 ** 7 ** 7 0.460
Cluster þ þ *** þ 0.590
Distance þ þ ** þ ** þ 0.470
Academic spin-off 7 þ 7
Corporate spin-off 7 7 7 ** 7 0.255
Strategic partner þ þ þ ** þ 0.387
Patent þ þ 7
Prototype þ 7 *** 7 *** 7 0.529
Diversity (product) þ 7 7
Diversity (single) þ þ þ
Segment (b2c) þ þ *** þ ** þ 0.602
Pioneer strategy þ þ þ
Notes: ***p50.01, **p 5 0.05, *p 5 0.1. Numbers are variable loadings.
provide VC firms with a great return. As VC firms want to maximize their return on
investment in terms of the internal rate of return, they should focus on the variables
that are responsible for high-flyer exits in order to optimise their fund performance.
The results of this study suggest that VC firms should invest in very young
ventures that do not even have a proof of concept at the time of first-round
investment. The portfolio companies should have strategic partners but should not
be corporate spin-offs. Ideally, they should be located in a big city and not more than
50 km away from their first-round lead investor. The selection criterion that most
discriminated between high-flyer and non-high-flyer exits is the b2c segment.
Ventures that target only the b2c market have a much higher chance of providing a
high-flyer exit than do ventures that target the b2b or both markets.
Following these results, it seems that most German VC firms made exactly the
wrong move after the 2008 crisis by shifting their focus to later-stage investments
(BVK 2011). What seems to be a promising VC business model is a combination of
business incubation and VC. These VC incubators support new ventures from the
very beginning while also providing working space and money at a very early stage.
The location assumptions are also met as most VC incubators provide working space
close by and are also located in the major German cities.
The only variable with a significant influence on high-flyer exit that does not
work as expected is the proof of concept variable. Why does a proof of concept seem
to reduce high flyer probability? We argue that portfolio companies are in a process
of development that determines the odds of success. The longer the process endures,
the lower the risks but also the lower the chances of success. The whole process
contains risks (of market exit or abandonment of the business idea), being highest
when starting, because that is when the uncertainty concerning marketability,
customer needs or feasibility is greatest. By gathering current information and
learning, this uncertainty drops with the ongoing process. At the outset, most
decision alternatives and developmental options are available (Shepherd and
Zacharakis 1999). As development proceeds, the headroom for development,
process risks as well as the options to act and decide continuously decrease. The
development options for young or nascent ventures can thus be described with the
metaphor of scissors, which are opened wide at first and then gradually close.
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The proof of concept is a special milestone in the process, because it documents

the business idea as feasible and the venture as viable. By this point, the risk of exit
or abandonment has already been substantially reduced. On the other hand, further
development is concretized and therefore limited by a proof of concept.
Consequently, the option headroom becomes smaller.
This process comes with an increasing degree of commitments and determina-
tions, e.g., concerning products, operations, team members, customers or markets.
Many of these constraints become obvious by the proof of concept: it locks some
decisions into position, because it is only valid for a set of appointed preconditions.
If the portfolio company stays too long at the lowest edge of its development
potential, it will fail. If it survives, however, its development potential narrows,
because the uncertainty concerning risks and chances decreases. This assumption is
underlined by empirical evidence. Studies show that early growth of ventures
negatively correlates with venture age (Garnsey, Stam and Heffernan 2006; Gilbert,
McDougall and Audretsch 2006; Schulte 2002) and that the first stage of venture
development also incurs the highest exit risks (Brüderl and Schüssler 1990;
Mahmood 2000).
VC investors therefore have to consider that an early engagement comes with
more risks of loss and more chances to multiply the amount invested. An engage-
ment after the proof of concept limits the curve of potential to a floor as well as to a
ceiling. This scissors approach might explain why the hypothesized correlation
between proof of concept and high-flyer exit performance has to be rejected,
although other studies have found evidence for it in terms of overall performance.
In generalizing our results, several limitations merit discussion. First, our sample
only consists of 64 cases, which is a comparatively low number for conducting
regressions and discriminant analysis. However, VC investment data are very
difficult to obtain and there are no studies with as many as 64 cases. But it means
that the results of our analysis have to be interpreted carefully if they are to be
generalized. Second, our results cannot be extended to the entire VC industry. We
only used data of German-based VC firms that operate in an environment different
from that of other countries in terms of taxes, governmental support and industry
development. Thus, one has to be careful when applying our results to VC
investments of other countries. Moreover, the results of the discriminant analysis
showed that different industries have different success predictors in terms of high-
flyer exit performance. Thus, the specific success prediction model might differ by
industry. Third, our sample is limited to exit between 2000 and 2010. It has been
shown that markets can change rapidly in certain periods (Gompers et al. 2008; Peng
2001; Schefczyk 2001) and that these changes could result different predictors of
success. Finally, it is important to note that we only differentiated high flyers from
non-high flyers. Even though most VC firms try to only invest in potential high
flyers, VC firms can also generate a superior overall performance with a high ratio of
medium-return exits (Hege, Palomino and Schwienbacher 2009). This investment
strategy is not covered by our study and might actually require different success
predictors.
As virtually no VC firms publish their performance data, this field of research is
quite a challenging one. The results of further studies in this field can provide many
relevant insights and add both theoretical and practical value not only for
researchers but also for VC firms themselves. This study shows that some variables
predict later high-flyer exit performance, even though the number of cases is limited.
20
48 J.-G.Streletzki
R.Schulte
Schulte
In the future, researchers should try to extend our findings in order to develop a
model that not only differentiates among different selection criteria that predict later
exit performance but also differentiates among industries, years and types of
investing VC firms. Further findings in this field of research will provide advanced
insights and eventually lower the high risk of VC investments. This would not only
support VC firms with their investment decisions but also lead to a growth of the VC
industry as a whole and open up further possibilities to finance young ventures,
thereby increasing innovation.
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Venture Capital: An International

Which venture capital selection criteria

To link to this article: http://dx.doi.org/10.1080/13691066.2012.724232

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Department of Entrepreneurship and Start-up Management, Leuphana University of Lueneburg,

This study is based on an analysis of 64 ventures that were funded by German

*Corresponding author. Email: streletzki@uni.leuphana.de

Review of prior research

VC ﬁrm selection criteria

While studies, using exit survival as a measure of performance, ﬁnd a positive

Location (regional networks and clusters)

portfolio of company’s development. Researchers explain the positive eﬀect of

to obtain external VC because of a higher degree of uncertainty and potential for

technical, ﬁnancial, legal or start-up expertise. Generally, the existence of partner-

Brettel (2002) identiﬁed a functioning prototype as the most important product-

Table 1. Expected high-ﬂyer predictors of selection criteria based on prior research.

Diversity (single) focus x Diversity

Table 2. High-ﬂyer and non-high-ﬂy exit channels.

Table 3. Independent variables.

Strategic partner The number of strategic partners (downstream, upstream or

Table 4. Descriptive sample results.

Table 5. Correlations among the variables.

1. High-ﬂyer exit 1.000

2. Industry 0.097 1.000

7. Academic spin-oﬀ 0.032 0.211* 0.145 0.296** 0.040 0.160 1.000

n ¼ 64, ***p 5 0.01; **p 5 0.05; *p 5 0.1.

of a dichotomic-dependent variable (0 ¼ failure/1 ¼ success) by modeling the log

Analysis and results

Table 6. Non-founder-related logit models of high-ﬂy-exits.

Model (1) Model (2) Model (3)

Strategic partner 1.404**

academic spin-oﬀs. Concerning strategic partners, we ﬁnd the company model to

Table 7. Discriminant analysis of exit predictors.

Model (1) Model (2)

Observations (nHF-HF) 54–10 39–5

Discussion and conclusion

Table 8. Summary of the relationships among variables.

Expected Correlations Logit Discrim

Notes: ***p50.01, **p 5 0.05, *p 5 0.1. Numbers are variable loadings.

The proof of concept is a special milestone in the process, because it documents

with large partners.’’ Academy of Management Executive 15 (1): 139–49.

Business Research 18 (69): 47–56.

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n ¼ 64, p 5 0.01; p 5 0.05; p 5 0.1.

Notes: p50.01, p 5 0.05, p 5 0.1. Numbers are variable loadings.