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How Do Venture Capitalists Make Decisions? Research Paper Tackling That Question Receives Top Prize From Journal of Financial Economics

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A prominent journal in academic finance has awarded top honors to a research paper that used hard data to demystify how venture capitalists select deals and think about the success of their investments.

Steven Kaplan

The paper, titled “How do venture capitalists make decisions?” was published in January 2020 in the Journal of Financial Economics. It was coauthored by Steven Kaplan, Neubauer Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business and Kessenich E.P. Faculty Director of the Polsky Center, along with Paul Gompers at Harvard University Graduate School of Business; Will Gornall at the Sauder School of Business at the University of British Columbia; and Ilya Strebulaev at the Stanford University Graduate School of Business.

The 2020 JFE Best Paper Contest awarded the paper First Prize in the Jensen Prizes for Corporate Finance and Organizations, making it one of the best academic finance papers of the year as judged by the top journals.

The researchers surveyed 885 institutional venture capitalists at 681 firms about practices in pre-investment screening, structuring investments, and post-investment monitoring and advising.

The survey found that VCs see the management team as somewhat more important than business-related characteristics such as product or technology. VCs also view the team as more important than the business to the ultimate success or failure of their investments.

In addition, the survey found, VCs rate deal selection as the most important factor contributing to value creation, more than deal sourcing or post-investment advising.

The researchers explored the topic because there was not a lot of hard, systematic evidence to answer questions about how venture capitalists make decisions about their investments, Kaplan said. The large survey sample, which included top VC firms, distinguished the research, he said.

“We were fortunate in that we had access to the Booth, Harvard and Stanford networks as well as the Kauffman Fellows,” Kaplan said.

“Many academics now use this paper when they teach VC investing to MBA students because it explains what VCs do and how they make decisions,” he added. “The paper also is useful to practitioners, particularly entrepreneurs, in understanding how VCs think and, therefore, how they should interact with VCs.”


Article by Alexia Elejalde-Ruiz, associate director of media relations and external communications at the Polsky Center. Alexia was a journalist for 20 years and joined Polsky from the Chicago Tribune, where she was a business reporter. Reach Alexia via email or on Twitter @alexiaer.

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