A new study provides rare insights into the investment behavior of venture capitalists. Surprisingly, numbers are not always decisive in due diligence.
How is Europe’s venture capital scene ticking? Which criteria guide European venture capitalists to financing decisions? That’s what the Austrian early-stage investor wants Speedinvest and the Technical University of Munich based on a new study show. To do this, they surveyed 437 investors across Europe (most of them in Germany) – with some surprising results.
read too
In first place: your own network
Among other things, they looked at how venture capitalists get new investments. Here, the network is the be-all and end-all. European investors proactively generate the majority of deals on their own initiative via their existing network (29 percent). In second place are leads from the professional network (28 percent), followed by referrals and disclosures from other venture capital firms or Business Angels (21 percent). Recommendations from existing portfolio companies or the founding team play less of a role.
When it comes to the startup itself, the founders are the most important factor in the decisions of venture capitalists: almost half of all respondents stated that they value the team at the top when evaluating startups.
Facts and figures are all well and good, but in the end many investors seem to rely on their own feelings. A total of 42 percent decide the investment question after getting to know the founders for the first time based on their gut feeling. And the founders play an important role in this: 64 percent of investors believe that the success of a startup is linked to the management team. A full 71 percent attribute the failure of a company to them.
“Gut feeling” also with key figures
A lot about intuition rather than numbers, which also confirms the demand for the importance of financial indicators. Venture capitalists are usually known as “number crunchers” because they analyze a startup’s financial situation in great detail before making a possible investment. However, a whopping 13 percent of investors now stated that they do not rely on detailed analyzes of financial indicators when making investment decisions.
According to the study, however, those who deal with the numbers pay particular attention to three things: For three quarters of those surveyed, the most important thing by far is the increase in sales and earnings of the startups, the so-called “sales multiple”. Almost half of investors cited the “cash-on-cash multiple,” the amount the VC will receive upon exiting the investment divided by the amount they originally invested in the company. And 32 percent look at the hurdle rate, or IRR — which in most cases calculates the startup’s minimum annual return percentage. On average, the VCs surveyed are aiming for a fivefold return and an IRR of 30 percent.
Respondents spend an average of 94 hours on the due diligence process to get these numbers. On average, they get seven references from outside and a deal usually takes 68 days, from pitch to closing.
As the economy started to weaken in 2022, changed according to the Speedinvest-Survey also the priorities of investors. Founders should expect investors to pay significantly more attention to their startup’s entry valuation, the soundness and potential profitability of the business model, and the past experience of the management team.
European unicorns are overrated
Investors are relatively divided when it comes to naming the most important factor for them when evaluating a startup. 65 percent of those surveyed stated that in the past they had primarily paid attention to the desired ownership share. Now, however, the opinions are divided almost equally (each around 30 percent) on three different points: In addition to the desired ownership share, the probable exit from the company and the evaluation of the start-up in comparison to other, comparable investments are on the same podium.
Another exciting takeaway: the overwhelming majority of 84 percent of respondents find the European unicorns overvalued in the current market. And it made no difference whether the VC himself already had a unicorn in his portfolio or not – almost everyone felt the same here.
read too
