Several recent studies have examined the causes of success and failure in new ventures. From these a three-level analysis has evolved, which considers the management, the venture's strategy, and its competitive environment. Empirical testing is still at an early stage, but results have generally supported the three-level approach. However, the findings are not very strong. This study considers only high potential, technology based new ventures-the companies on which venture capitalists concentrate. It suggests that such firms face unusual time pressures and uncertainty, and that their responses to these forces are major determinants of success or failure. We propose 11 easily measured qualities-describing management, the firm's strategy, and its environment-which should influence how quickly the venture can act. These should predict a new venture's performance. The 11 attributes are tested on 36 new ventures, representing essentially all of the startup investments of a major venture capital firm between 1974 and 1982. The data are taken from the firms' original business plans. Performance is measured from the subsequent financial history, using the compound rate of return to all shareholders (founders, employees, and investors). The ventures in this sample are primarily based on electronic or information technologies. They are highly successful as a group, with an average compound rate of return of 98% per year. They are also very risky; the standard deviation of returns is 171% per year, and in 11 of 36 cases the shareholders lost on their investments. Results from a single sample must always be treated cautiously. However, several findings are strong enough to merit further study and to be incorporated as a part of a process for evaluating new ventures: 1. 1. A set of four measures-representing all three areas-explains 57% of the variance. The four-completeness of the founding team, technical superiority of the product, expected time for product development, and buyer concentration-all behave as expected. The first two have a positive effect; the latter two have an inverted U-shaped relationship with an optimum development time of 12 months and an optimum number of customers of approximately 60. Three other measures-prior shared experience of the founders, competitive conditions, and projected market share-show an influence when management, strategy, and environment are examined one area at a time. 2. 2. These relatively simple measures predict success well, probably at least as well as any other study has done using more subtle measures. 3. 3. The measures used in this study, though they have strong predictive power, apparently did not influence the young capitalists. Otherwise the relationships should have been different when the return to venture capital investors was used in place of the total return; in fact they were the same. This suggests that the venture capital investors did not give sufficient weight to the qualities that we consider, and could make better choices by giving greater attention to those measures. 4. 4. Prospective entrepreneurs and investors should benefit from using our model aspart of their screening processes. Specifically, they might calculate a predicted rate of return. If it is low-say, below 30% per year-they should examine the reason for the low score and consider whether circumstances exist which outweigh or invalidate that apparent weakness. 5. 5. An "additive" model seems realistic. That is, one can combine dissimilar qualities (with appropriate weighting for relative importance) to arrive at an overall figure of merit with strong predictive power. The specific parameters imply that a company must have a complete management team and score well on two of the remaining three measures in order to be an attractive opportunity. More generally, the model allows a practitioner to make a rough assessment of the tradeoffs among management, product, and industry. This is important because few, if any, new companies have all the qualities an investor may desire. 6. 6. Although individual qualities of the founders are no doubt important, this remains a difficult matter to demonstrate statistically. 7. 7. Firms exist in an ever changing competitive environment. To the extent that these findings are valid beyond this sample, they may have been recognized and incorporated in more recent new ventures. If so this may change the nature of competition, and alter the key determinants of success or failure. © 1990.
