News & Events
Thursday, Sep 24, 2009Venture capitalists rely heavily on ‘gut feelings’
Posted by dgore
GRAZIADIO IN THE NEW
Mercury News columnist Scott Duke Harris wrote:
Pepperdine University finance professor John Paglia, (lead researcher) of the new Pepperdine Private Capital Markets Study, said he was startled by one finding in its recent survey of financiers.What do you think matters more to a venture capitalist pondering an investment?
A financial metric such as a discounted cash-flow analysis? Or a “gut feeling”?”Gut feelings” were cited by 67 percent of 185 venture capitalists surveyed, while the cash-flow analysis was cited by 43 percent, according to the study scheduled for release today. (Some said they relied on both.)
The heavy reliance on gut instincts “just makes us cringe in corporate finance,” Paglia said.
It also illustrates, Paglia acknowledged, that VCs are a distinct breed in the world of finance.
That’s something well known to the denizens of Silicon Valley. The surprise to me, frankly, is that 33 percent of VCs evidently discount their innards.
Upon second thought, the difference might be explained by the stage of investments.
Only instincts could explain why Founders Fund’s Peter Theil or Accel Partners’ Jim Breyer would attach great expectations to a college student pushing something called Facebook.
How do you analyze cash flow for a nifty new technology — Skype, say, or Twitter — when monetization plans are still sketchy? Or how do you evaluate an alternative-energy notion that could gobble millions and might either earn billions or not a dime?
Paglia agreed with my suggestion that maybe the 33 percent were late-stage VCs who have revenue numbers to crunch. (And maybe they just lack the guts for early-stage risk.)
The full article may be found here.
Source: San Jose Mercury News
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- Pepperdine University national study shows private capital providers have very high expectation for return on investment
- Venture capital firms still optimistic about fund-raising
- Venture capital, still seeking the next big thing
- High investment return expectations may limit VC spending
Category : In the News | Paglia | Research
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