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The search for capital can be time consuming, especially if several investors must be approached before any firm commitments are received. One source of funding is the venture capital firm. Barry, Muscarella, Peavy, and Vetsuzpens (1990) report that 28 percent of the 1978-1987 initial public offerings they examined were backed by venture capital.
The funding proposals submitted to venture capitalists often undergo an intensive evaluation before a decision is made (Batterson 1986). With the difficulty of procuring capital, it is vital that small business owners narrow their search to venture capitalists whose preferences match the characteristics of the venture firm (Greenfield 1989, Hisrich and Peters 1989). In this process of locating a suitable investor, it is important to be able to (a) categorize potential investors based on their investment preferences, and (b) understand the criteria that investors from various categories use to evaluate their prospective investments. Small business owners can determine venture capitalist's investment preferences through direct inquiry, use of an intermediary, or the review of venture capital directories such as the Guide to Venture Capital Sources, Capital Publishing, Wellesley Hills, Mass. Once a match is made, the small business owner must still convince the venture capitalist of the merits of the firm's salient features.
While previous work has examined the relative significance of various evaluation criteria for venture capital projects, there has been little study of the relationship between evaluation criteria and the investment preferences of the venture capitalist. One such preference involves the stage of development of the prospective venture firm. Yet, there is evidence to suggest that the stage of firm development may be important to investors.
The purpose of this study is to examine the importance to potential investors of the stage of development of venture firms and its relationship to project evaluation criteria. In addition, trends in venture capitalists' project analysis and control are identified based upon their preferences for investments in particular stages. If venture capitalists have stage preferences, and the importance of project evaluation criteria and project control vary with these preferences, this information can be important to small business owners in their narrowing of potential sources of capital and in the preparation of capital acquisition proposals. As argued by MacMillan, Siegel, and Narasimha (1985), by making venture...