Private equity and venture capitalists' investment criteria in the Czech Republic

641 ACTA UNIVERSITATIS AGRICULTURAE ET SILVICULTURAE MENDELIANAE BRUNENSIS Volume LVIII 65 Number 6, 2010 PRIVATE EQUITY AND VENTURE CAPITALISTS’ INVESTMENT CRITERIA IN THE CZECH REPUBLIC M. Zinecker, J. Rajchlová Received: August 23, 2010 ZINECKER, M., RAJCHLOVÁ, J.: Private equity and venture capitalists’ investment criteria in the Czech Republic. Acta univ. agric. et silvic. Mendel. Brun., 2010, LVIII, No. 6, pp. 641–652 Abstract For investment decision making to be rational, the existence of investment criteria is required. In the theory of fi nancial management, the eff ectiveness of investment is traditionally judged by the degree to which an investment proposal contributes to achieving the main fi nancial goal of business, i.e. market value maximization of the fi rm. So far, potential businesses for Private Equity and Venture Capital fi nancing in the Czech Republic have not had information regarding investment criteria and their signifi cance, when considered by investors, at their disposal, which is due to absence of relevant research results. This article presents results of the research project whose aim is to establish which criteria are considered to perform an essential role in the selection of business proposals by fi rms investing Private Equity and Venture Capital in the Czech Republic as well as the most common reasons for rejecting the proposals. Based on practical experience of fi nancing by Private Equity and Venture Capital, the research made it possible to identify the most signifi cant criteria, namely characterization of management, market, product and the rate of investment capital appreciation. The results of the research are consequently compared with fi ndings which were published in similar studies undertaken in the past (e.g. Tyebjee, Bruno, 1984; Fried, Hisrich, 1994; MacMillan et al., 1985, 1987; Muzyka et al., 1996; Eisele, 2002). The research supports the thesis that, when considering business proposals, above-average weight is attached to criteria concerning the characterization of management, i.e. experience and competencies in all stages of business life cycle. Nevertheless, the fulfi lment of the criteria is not suffi cient for investors to evaluate a business proposal positively. They also place an emphasis on selected criteria related to market and product. By publishing empirical data, an important signal regarding upto-date evaluative criteria and their weight is sent to those interested in fi nancing by means of Private Equity/Venture Capital as well as investors in Private Equity and Venture Capital funds and to investment companies. private equity, venture capital, business proposals, investment decision making, investment criteria Rational investment decision making necessitates the existence of investment criteria. In the theory of fi nancial management, the eff ectiveness of investment is traditionally judged by the degree to which an investment proposal contributes to achieving the main fi nancial goal of business, i.e. market value maximization of a fi rm. A net present value of an investment proposal is established as a criterion in deciding about whether an investment proposal is acceptable or not, for only investments with a positive net present value contribute to the growth of market value of the fi rm (cf. Nývltová, Režňáková, 2007; Valach, 2006). However, the net present value is infl uenced by the value of individual cash fl ow, incoming and outcoming, which may not be certain. Therefore, an investor will be willing to provide capital only if an investment risk is rewarded in the form of a risk premium. 642 M. Zinecker, J. Rajchlová With reference to investment decision making in the area of Private Equity and Venture Capital, there is typically a higher extent of information asymmetry between an external capital provider and those who receive it. Hartmann, Wendels (1987) state that the quality of the investment portfolio of a capital provider depends, in particular, on their ability to assess the risk of individual proposals. To be successful, a selection of appropriate investment criteria in the investment decision making is crucial. Identifi - cation and evaluation of signifi cance of these criteria have been dealt with in numerous research projects undertaken particularly in the USA and Germany Private Equity and Venture Capital markets, dating from the seventies up to the present. Tyebjee, Bruno (1984), Fried, Hisrich (1994), MacMillan et al. (1985, 1987) and Muzyka et al. (1996) emphasize the existence and signifi cance of the following criteria when considering business proposals: market size and attractiveness, management’s competencies, product uniqueness, product acceptance in the market and competition intensity. Stu dies conducted in Germany by Laub (1989), Schröder (1992) and Eisele et al. (2002) contributed to identifi cation of decision criteria in German market. The last of the above-mentioned studies was also dedicated to the weight of evaluative criteria in individual stages of development of the business in which an investment is realized. At present, potential businesses for Private Equity and Venture Capital fi nancing in the Czech Republic do not have information regarding investment criteria and their signifi cance, when considered by investors, at their disposal, which is due to the absence of relevant research results. The fact stimulated this research, whose aim is to identify evaluative criteria of investment proposals from the point of view of Private Equity and Venture Capital investors in the Czech Republic as well as consider the weight of these criteria according to individual stages of development of a business. This research also investigates the reasons why investors refuse to fi nance some business proposals. METHODOLOGY As a research tool, a questionnaire was designed to collect data. The main reason for selecting a questionnaire was experience of the foreign colleagues quoted above. We also aimed for the least timeconsuming method for respondents. Furthermore, a standardized questionnaire, unlike an interview, excludes undesired subjectivity. The questionnaire is based on 37 evaluative criteria divided into six sections, each of which evaluates management’s psychological characteristics, their competencies and functional background, product, relevant market and fi nancial plans. The selection of the evaluative criteria was infl uenced by foreign research (Eisele et al., 2002; Tyebjee, Bruno, 1984; Fried, Hisrich, 1994; MacMillan et al., 1985, 1987; Muzyka, 1987) and consultations with CVCA representatives. A respondent holding the position of an investment analyst was asked to express the weight attached to individual criteria by qualitative evaluation, i.e. by selecting a relevant point on a four-point ordinal scale. For further information concerning the levels of weight attached to the evaluative criteria see Table I. As the evaluation of criteria was conducted for each stage of development of a business separately, the object of this research could be achieved refl ecting changes in the weight attached to the evaluative criteria between individual stages of business life cycle defi ned in Table II. Reasons for rejecting business proposals are found by means of an open question addressed to respondents. The questionnaire includes a part dedi cated to identifi cation of the private equity fund concerning the respondent. All 13 regular members of Czech Private Equity and Venture Capital Association (herea er cited as CVCA) were asked to complete the questionnaire. These members represent the main source of institutionalized, profi t-oriented Private Equity and Venture Capital in the Czech Republic and were therefore selected as respondents (according to CVCA). The importance of non-institutionalized Private Equity and Venture Capital is impossible to assess taking the absence of relevant data into consideration. CVCA members are profi t-oriented businesses. Unlike some other countries, no state assistance in the form of Private Equity and Venture Capital fi nancing may be found in the Czech Republic. The main aim of institutions providing state assistance does not necessarily have to be making profi t, but, for instance, promoting enterprise and consequently job creation. I: Business proposals evaluation scale Level item Level item Description of the item 0 unimportant The criterion has no infl uence upon the investor’s decision-making about their capital investment in the business. 1 less signifi cant The criterion increases the probability of the investor’s capital investment in a business. 2 of high signifi cance The criterion, if fulfi lled, supports the investor in capital investment in the business. 3 indispensable The criterion which is absolutely necessary for the investor to decide for capital investment in the business. Source: adapted from EISELE et al., 2002 Private Equity and Venture Capitalists’ investment criteria in the Czech Republic 643 Members of the association, or to be more precise their management, were sent a questionnaire with an accompanying email. If a respondent did not react to the request for participation in the research within two weeks, they were contacted by phone. Two businesses did not respond to our request and two respondents refused to participate in the research. Consequently, the total sample consists of eight respondents, i.e. 62% of the questionnaires were returned. Data collection was organized II: Stage defi nitions (investment tables) Stage Stage defi nition Early Stage (Seed, Start-up) Seed: Financing provided to research, assess and develop an initial concept before a business has reached the start-up phase. Start up: Financing provided to companies for product development and initial marketing. Companies may be in the process of being set up of may have been in business for a short time, but have not sold their product commercially. Later Stage Venture Financing provided for the expansion of an operating company, which may or may not be breaking even or trading profi tably. Late stage venture tends to be fi nancing into companies already backed by venture capitalists, therefore they would be C or D rounds of fi nancing. Buyouts (Growth, Rescue/ Turnaround, Replacement capital, Buyouts) Grow: It is a type of private equity investment, most o en a minority investment but not necessarily, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets of fi nance a signifi cant acquisition without a change of control of the business. As a round of fi nancing, growth capital tends to be the fi rst private equity backing of the company. Additionally, all investments made by buyout funds into venture type of stages should be defi ned as growth capital. Rescue/turnaround: Financing made available to an existing business, which has experienced trading diffi culties, with a view to re-establishing prosperity. Secondary purchase/replacement capital: Minority stake purchase of existing shares in a company, from another private equity investment organization or from another shareholder or shareholders. Management buyout: Financing provided to enable current operating management and investors to acquire existing product line or business. Management buy-in: Financing provided to enable a manager or group of managers from outside the company to buy-in to the company with the support of private equity investors. Public to private: A transaction involving an off er for the entire share capital of a listed target company for the purpose of delisting the company, management may be involved in the off ering. Other PIPE: A private investment in public equity as a minority or majority stake without taking the company private. Other leveraged buyout: Financing provided to acquire a company (other than MBI, MBO, public to private or other PIPE), by using signifi cant amount of borrowed money to meet the cost of acquisition. Source: EVCA, 2008 0 1 2 3 4 5 6 7 8 Agriculture Business and indust rial product s Business and industrial services Chemicals and material s Communications Computer and consumer electronic s Transportation Construction Consumer goods and reta il Consumer services Energy and environmen t Financial services Life sciences Others 1: Branches of business in which Private Equity and Venture Capital firms realize their investments in the Czech Republic Source: own research 644 M. Zinecker, J. Rajchlová in March and April 2010. The data were processed using Microso Excel and descriptive statistics methods. The sample may be further characterized by the following information: • fi rms investing Private Equity and Venture Capital in the Czech Republic have a base in the Czech Republic, USA, UK, Netherlands, Austria, Belgium and Finland. • branches of business in which these fi rms realize their investments most frequently fall into the following categories: Business and Industrial Products, Business and Industrial Services and Communications (see Fig. 1) • proposals in Buyouts stage account for 65.9% of investment portfolio value of the fi rms. The proposals in the other stages make up a lower proportion of investment portfolio value. (Later Stage Venture – 25.9%; Early Stage – 8.3%). RESULTS Table III shows evaluative criteria of business proposals divided into six sections according to topic. The respondent was asked to consider the weight of a criterion in the process of investment decision making on a scale ranging from zero to three for individual stages of business life cycle (Early Stage, Later Stage Venture, Buyouts). Figure refl ecting average evaluation of the weight attached to a criterion in individual stages and fi gure refl ecting standard deviation are shown in columns 2–7. To be able to determine whether a criterion is considered to perform an essential or secondary role in investment decision making, reference values have been defi ned for individual investment stages. They are expressed as an average of average weight evaluation of all criteria (i.e. criteria 1–37) in individual investment stages. Reference values are 1.77 for Early Stage, 1.82 for Later Stage Venture and 1.89 for Buyouts. Table III also provides information on the relative frequency of the Indispensable level item for indivi dual criteria. Thus, it is evident which criteria need to be satisfi ed for the majority of investors to evaluate a business proposal positively and subsequently decide to realize their investment in it. Management’s Evaluation With regard to a manager’s personality, investors lay a particular emphasis on high level of performance and perseverance. Average weight attached to this criterion in individual stages of business life cycle is 2.5 (Early Stage), 2.3 (Later Stage Venture) and 2.3 (Buyouts). Respondents were homogenous in their answers, which is indicated by the low standard deviation. It is indispensable for 66.7% of respondents to fulfi l this criterion in Early Stage. In Later Stage Venture and Buyouts stages to the contrary, the criterion was viewed as necessary for 50 and 37.5% of respondents respectively. An investor’s decision making is in all stages of business life cycle also considerably infl uenced by ability of senior management to identify problems, to set objectives and to allocate tasks; ability of senior management to identify and to evaluate risks, the ability of senior management of the right response to risks; and ability of senior management to represent the business idea. In the fi rst section, no single criterion may be classifi ed as indispensable by investors throughout all stages. The points attached to management’s eff ort to independence may be considered insignifi cant. Investors regard a high level of performance and perseverance of senior management as the most important cri0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1 1,1 1,2 1,3 1,4 1,5 1,6 1,7 1,8 1,9 2 2,1 2,2 2,3 2,4 2,5 2,6 2,7 2,8 2,9 3 1234567891011121314151617181920212223242527282930313233 EarlySta. LVS BY 2: Average weight attached to criteria in individual stages Source: own research Private Equity and Venture Capitalists’ investment criteria in the Czech Republic 645 terion in Early Stage (average weight 2.5). A great emphasis is also laid on the ability of senior management to represent the business idea, to identify and to evaluate risks, the ability of senior management of the right response to risks and the ability to identify problems, to set objectives and to allocate tasks. The order of criterions according to the weight attached to them in Later Stage Venture is identical with the order in Early Stage. As far as Buyouts stage is concerned, the highest average weight is carried by the ability of senior management to identify problems, to set objectives and to allocate tasks (average weight 2.5). Criteria related to management’s competencies, i.e. criteria which may be viewed more objectively, carry less weight, if compared with the variables in the previous section. The second section also contains a lower number of variables whose prese nce is considered indispensable by the absolute majori ty of respondents. The only exception is the criterion that management exactly knows the market targeted by the venture. Average weight in Early Stage is 2.5, in Later Stage Venture 2.3 and in Buyouts stage 2.6. The most signifi cant criterion in terms of weight in Buyouts stage is considered to be the competency of senior management to act as a leader (average weight 2.8, standard deviation 0.4). In this stage, 75% of respondents consider fulfi lling this criterion as indispensable, whereas in Early Stage, not a single respondent does. As for criteria evaluating experience and competencies of a manager in the fi eld of production management, marketing and fi nancial management, growing weight attached to the criteria is evident in later stages of business life cycle (Later Stage Venture, Buyouts). Experience and competencies in the fi eld of research and development are, from investment analysts’ point of view, the most signifi cant in Early Stage. From other criteria (criteria 15 to 17), signifi cance attaches to references of management from prior results in all stages of business life cycle. Another important criterion for investors, especially in Buyouts stage, is a balanced management team, i.e. it is composed of people with complementary functional backgrounds, competencies and skills. The evaluation of the share of the top management in the capital stock criterion amounts to average weight of 1.8 (Early Stage), 1.7 (Later Stage Venture) and 1.5 (Buyouts) and its fulfi lment is necessary for 50% of respondents to decide for an investment in Early Stage. The Product There are two criteria associated with the product which may be described as dominant in all stages of business life cycle as far as weight attached to them is concerned: utility of the product for customers is evidently recognizable and the product is evidently better compared to up to now off erings. Average weight attributed to the former was 2.5 in Early Stage (standard deviation 0.8), 2.5 in Later Stage Venture (standard deviation 0.5) and 2.6 in Buyouts stage (standard deviation 0.7). The criterion is indispensable for more than 50% of respondents in all stages. The second criterion is most signifi cant in Early Stage (average weight 2.8, standard deviation 0.4) and Later Stage Venture (average weight 2.5, standard deviation 0.5), whereas in Buyouts stage, average weight attached to the criterion falls to 1.9 (standard deviation 0.8). It is indispensable for 83.3% of respondents in Early Stage to satisfy the criterion if a business proposal should be fi nanced (in Later Stage Venture the criterion was perceived indispensable by 50% of respondents, in Buyouts stage by 25% of respondents). The criteria 18 to 23 are of greater signifi cance than criteria 24 and 25 in Early Stage. In this respect, this stage diff ers from Later Stage Venture and Buyouts, in which 50 and 75% of respondents respectively rate the criterion that the product is obviously accepted in the market as indispensable. Similarly, the importance of criterion 23 (a functioning prototype of the product exists) grows in the later stages of fi nancing in the form of Private Equity and Venture Capital. Financing by fi rms investing Private Equity and Venture Capital is not considerably conditioned upon whether a product is classifi ed as a „High Tech“ pro duct or not. This holds true for any stage of fi nancing. Nevertheless, it is necessary to highlight that average weight attached to this criterion varies in individual stages of business life cycle (1.3 in Early Stage, 0.8 in Later Stage Venture and 0.5 in Buyouts). The criterion that the product or the way of its manufacturing are proprietary exceeds the level of reference values in Early Stage. It is necessary for 50% of respondents to satisfy this criterion, whereas the importance of the criterion in the later stages of business life cycle is below average. The criterion that the product disposes of potential to create a product family ranks lower than reference values in all stages of evaluation. Evaluation of Relevant Market Two diff erent tendencies may be discovered on the basis of results produced by the research into criteria. Whereas the most signifi cant criteria for Early Stage are that the market is growing fast enough and that the competition on the market is weak (average weight 2.3 and 2.0, respectively, standard deviation 0.5 and 0.6, respectively), the crucial criterion in Later Stage Venture and Buyouts is that there is suffi cient access to the market targeted by a business (average weight 2.2 and 2.6, respectively, standard deviation 0.7 and 0.6, respectively). That there is suffi cient access to the market targeted by the business is indispensable for 62.5% of respondents in Buyouts stage. The possibility of participating in the business opening access to international or new markets was not seen as an important criterion in the process of evaluating business proposals by a majority of respondents. Fulfi lment of this criterion was required by only one respondent. The results of the research also show diff erences between the signifi cance of the characteristics of market in individual stages of Private Equity and Venture Capital investment. For an investor fi nancing the development of a business in the initial stage, the fact that the market is growing fast enough and the competition on the market is weak a er launch of the product is 646 M. Zinecker, J. Rajchlová III: Average weight attached to criteria, standard deviation and relative frequency of Indispensable level item Source: own research and Eisele et al. (2002) Early Stage Later Stage Venture Buyouts Relative frequency of Indispensable level item average standard deviation average standard deviation average standard deviation Early Stage Later Stage Venture Buyouts 1 2345678910 I. Top management’s psychological characteristics and cognitive capabilities ability of senior management to represent the business idea 2.3 0.9 2.2 0.7 2.1 0.6 66.70 33.33 25.00 high level of performance and perseverance of senior management 2.5 0.8 2.3 0.7 2.3 0.7 66.70 50.00 37.50 ability of senior management to identify and to evaluate risks, the ability of senior management of the right response to risks 2.3 0.7 2.3 0.7 2.4 0.9 50.00 50.00 62.50 ability of senior management to identify problems, to set objectives and to allocate tasks 2.3 0.7 2.3 0.7 2.5 0.7 50.00 50.00 62.50 ability of senior management to get their team members for common vision 2.2 1.1 2.2 1.1 2.1 0.9 50.00 50.00 37.50 management’s characteristics such as commitment and attention to detail 2.2 0.9 2 0.8 2 0.9 50.00 33.33 37.50 management’s eff ort to independence 0.2 0.4 0.2 0.4 0.6 0.9 0.00 0.00 0.00 II. Top management’s competencies and functional backgrounds management exactly knows the market targeted by the venture 2.5 0.76 2.3 0.7 2.6 0.5 66.70 50.00 62.50 management’s competencies and experience in research and development 1.8 1.1 1.2 0.9 1.5 0.7 33.30 16.70 12.50 management’s competencies and experience in production management 2 0.6 2.2 0.7 2.3 0.7 20.00 40.00 42.90 competency of senior management to act as a leader 1.7 0.5 2.3 0.7 2.8 0.4 0.00 50.00 75.00 management is graduated, experience and references of management from prior places of employment 1.7 1.1 1.7 0.9 1.8 1 33.30 16.70 25.00 management’s competencies and experience in the fi eld of marketing 1 0.8 1.2 0.7 1.9 0.9 0.00 0.00 25.00 management’s competencies and experience in the fi eld of fi nancial management 1.5 0.5 1.8 0.4 2.1 0.3 0.00 0.00 12.50 III. Other criteria for top management’s evaluation share of the top management in the capital stock 1.8 1.3 1.7 1.2 1.5 1.1 50.00 33.30 25.00 management team is balanced, i.e. it is composed of people with complementary functional backgrounds, competencies and skills 1.8 0.9 1.8 0.9 2.3 0.8 33.30 33.30 50.00 references of management from prior results 2 0.8 2 0.8 2.1 0.6 33.30 33.30 25.00 Private Equity and Venture Capitalists’ investment criteria in the Czech Republic 647 III: (Contd): Average weight attached to criteria, standard deviation and relative frequency of Indispensable level item Source: own research and Eisele et al. (2002) Early Stage Later Stage Venture Buyouts Relative frequency of Indispensable level item average standard deviation average standard deviation average standard deviation Early Stage Later Stage Venture Buyouts 1 2345678910 IV. Product utility of the product for customers is evidently recognizable 2.5 0.8 2.5 0.5 2.6 0.7 66.70 50.00 75.00 the product is evidently better compared to up to now off erings 2.8 0.4 2.5 0.5 1.9 0.8 83.30 50.00 25.00 the product is of a high degree of innovation 2.3 0.7 1.8 0.7 1.1 0.6 50.00 16.70 0.00 the product is a „High Tech“ product 1.3 0.7 0.8 0.4 0.5 0.5 0.00 0.00 0.00 the product or the way of its manufacturing are proprietary 2.2 0.9 1.8 0.7 1.5 0.5 50.00 16.67 0.00 a functioning prototype of the product exists 2 0.8 2.3 0.7 2.3 1.1 33.33 50.00 62.50 the product is obviously accepted in the market 1.7 1.1 2.5 0.5 2.8 0.4 33.33 50.00 75.00 the product disposes of potential to create a product family 1.2 1.2 1.2 1 1.3 0.9 20.00 20.00 14.29 V. Market and market growth the market is growing fast enough 2.3 0.5 1.7 0.5 1.5 0.5 33.33 0.00 0.00 the competition on the market is weak in the fi rst period of three years a er launching 2 0.6 1.5 0.5 1.6 0.5 16.67 0.00 0.00 there is suffi cient access to the market targeted by a business 1.8 0.9 2.2 0.7 2.6 0.5 33.33 33.33 62.50 the business opens access to international markets 1.7 0.7 1.7 0.7 1.6 0.7 16.67 16.67 12.50 the business opens access to new markets 1.3 0.9 1.2 0.7 1.4 0.5 16.67 0.00 0.00 VI. Returns the possibility of achieving high future returns on investment in the business 3 0 2.5 0.5 2.4 0.5 100.00 50.00 37.50 it is possible to sell the share of the business quick and trouble-free 1.3 0.9 1.6 0.8 1.8 0.8 16.67 20.00 25.00 there is a potential to withdraw dividends continuously 0.7 0.5 0.7 0.5 0.8 0.7 0.00 0.00 0.00 required rate of return on investment/ROI (in per cent) 33.80 11.9 23.80 8.2 21.60 6.3 – – – required internal rate of return /IRR (in per cent) 37.50 11 25.83 7.88 21 5.2 – – – expected annual rate of return on investment portfolio (in per cent) 33.30 12 20 7.07 20 6.10 – – – the maximum time duration of the project (in years) 4.5 1.2 4.66 0.745 5.4 1.3 – – – 648 M. Zinecker, J. Rajchlová more relevant than suffi cient access to the market. On the other hand, suffi cient access to the market targeted by a business is a necessary prerequisite for investors to decide to invest. Financial Criteria A common feature may be observed in all stages of business life cycle in the sixth section of evaluative criteria – the eff ort of investors to maximize capital appreciation. 100% of respondents consider the fulfi lment of this criterion as indispensable in Early Stage, in Later Stage Venture and Buyouts 50 and 37.5%, respectively. Less than half of respondents view the criterion that it is possible to sell the share of the business quick and trouble-free and that there is a potential to withdraw dividends continuously as important. The results concerning required rate of return on investment and required internal rate of return are not surprising. The older a business is, the lower the values tend to be. On the other hand, shorter time duration of the project is preferred by investors in initial stages of business life cycle. Reasons for Rejecting Business Proposals The reasons for rejecting business proposals were found by means of an open question addressed to the respondents. Table IV shows an enumeration list of reasons for rejecting business proposals as stated by the respondents, i.e. fi rms investing Private Equity and Venture Capital in the Czech Republic. DISCUSSION Evaluation of the Management It may be claimed that evaluative criteria dealing with the character of a manager play a leading role in decision making of fi rms investing Private Equity and Venture Capital. The average weight attached to the six criteria exceeds reference values in all stages of business life cycle. The personality of a manager may also be viewed as an indicator of an investment risk. This assumption is supported by research results presented by Eisele et al. (2002), according to which ‘the competencies of management are important aspects aff ecting availability of Private Equity and Venture Capital’. Similarly, Khanin et al. (2008) confi rms that investors accent psychological characteristics of top management and their cognitive competencies, such as persistence, responsibility, attention to detail and positive attitude to risk. Robinson (1987) emphasizes that particularly the ability of senior management to act as a leader and be perceived as such by team members is relevant for investors. The crucial criterion in the category dedicated to management’s experience in all stages of business life cycle is management’s familiarity with the target market. In this respect, Eisele et al. (2002) state that ‘familiari ty with conditions in the target market in Early Stage diminishes the risk of particular errors as early as a business is launched, makes the specifi c direction of research and development possible and contributes to reduction of a loss-making potential of an investment’. Average weight attached to this criterion in Later Stage Venture as well as Buyouts remains higher than reference values and therefore demonstrates its decisive infl uence on successful business development in other stages, e.g. the potential of a business to exert pressure to launch a new or diff erentiated product (Eisele et al., 2002). The criterion regarding management’s competencies and experience in research and development is attached the greatest weight in Early Stage, which is not very surprising, as it is in this stage that technical viability of the product is tested, a prototype is developed and serial production is started. Technical risk associated with the development of a product fades into the background in the later stages of business life cycle and the importance of management’s competencies in the sphere of production management, leadership, marketing and fi nancial management grows. The results of the research in this category are in accord with conclusions published in studies which stress the signifi cance of management’s competencies. Fried, Hisrich (1994) highlight the importance of management’s experience in marketing, fi nance and IV: Reasons for rejecting business proposals Reason stated for rejecting proposals How many times stated unsuitable management 4 insuffi cient expected returns 2 unrealistic proposal 1 uncompetitive proposal 1 uninnovative proposal 1 insuffi cient opportunity for growth of proposal 1 inability of proposal to generate suffi cient cash fl ow 1 too early a stage of proposal 1 risk involved in proposal 1 product with no prospects 1 unsuitable branch of business 1 Source: own research Private Equity and Venture Capitalists’ investment criteria in the Czech Republic 649 production and therefore accent professional qualifi cation. Robinson (1987) and Knight (1992) recommend taking not only management’s competencies, but also their maturity on the basis of references into consideration when assessing the quality of management. The importance of references is also proved by this research, for it is the highest rated criterion in the section called Other criteria for top management’s evaluation. Muzyka et al. (1996) suggests that a management team should be balanced, i.e. its individual members should possess complementary competencies and skills. However, the results of the research imply that the criterion is assigned aboveaverage signifi cance only in Buyouts stage. Surprisingly enough, the criterion concerning the share of the top management in the capital stock is according to investors of average or below-average signifi cance if compared with reference values. The share of the top management in the capital stock may be viewed as a signal of a businessman’s trust in the business idea or as a means of reducing partners’ capital loss if the business plan fails (Eisele et al., 2002). Characterization of Product Many studies confi rm that fi rms investing Private Equity and Venture Capital determine quality of a product according to the following criteria: product uniqueness or its suffi cient diff erential in comparison with competitor’s off er (Muzyka et al., 1996), product patent protection (MacMillan et al., 1985, 1987; Zacharakis, Meyer, 1998) and the existence of functioning prototype (MacMillan et al., 1985, 1987). This research proves above-average importance of product uniqueness and its utility for the customer when evaluating business plans in all stages. In Early Stage, above-average signifi cance is attached to the criterion that the product is of a high degree of innovation. All the indications are that utility of the product for the customer and obvious distinction between the product and a product off ered by competitors are factors which aff ect the competitive position of the business and thus infl uence the extent to which an investment is successful, as they represent the potential for creation of values. Similar results were reported by Eisele et al. (2002). Contrary to all expectations, it is not important in any stage of business life cycle whether the product is a ‘high tech’ product or not. Product patent protection is a criterion of above-average signifi cance in Early Stage. The weight attached to patent production in other stages of business life cycle is lower, though, which contradicts the research by Eisele et al. (2002). According to him, ‘the existence of protective rights may imply that a company is active in a certain area of business and that it possesses corresponding know-how to prove its business activity and ability to innovate’. That a functioning prototype of the product exists and that the product is obviously accepted in the market are criteria whose importance reaches above-average levels in later stages of business development, i.e. Later Stage Venture and Buyouts. Only then are the investors able to decide whether the product is successful, i.e. if it has been accepted in the market. Characterization of Relevant Market The results of the research confi rm the conclusions drawn from foreign studies which identify the growth rate as the most signifi cant criterion characterizing the market in Early Stage (Eisele et al., 2002; Muzyka et al., 1996). The weight attached to this criterion decreases in Later Stage Venture and Buyouts and it is supposable that even other characteristics of the market, especially its absolute size, play a powerful role. Muzyka et al. (1996) emphasizes such a size of the market that ‘enables the business to achieve profi tability’. Above-average weight is in all stages of business life cycle attached to the criterion that there is suffi cient access to the market targeted by a business which is necessary for catering for the target market. The weight of this criterion increases in Later Stage Venture and Buyouts, which may be expected due to rising volume of sale in those stages. The relevance of this criterion is also underlined by Tyebjee and Bruno (1984). To the contrary, Eisele et al. (2002) reached a surprising conclusion in his research claiming that suffi cient access to the market targeted by a business is a criterion of below-average signifi cance for fi rms investing Private Equity and Venture Capital in Germany. According to Eisele (2002), gaining access to the market may be considered as the investor’s contribution in connection with a capital input to the business and thus the criterion has only average signifi cance in investment decision making. Anglo-Saxon literature places an emphasis on the extraordinary role played in investment decision making by the potential of the business in the sphere of access to international or new markets (MacMillan et al., 1985, 1987). The weight attached to this criterion in the Czech Republic is in comparison with the results published in these studies below average. Financial Criteria The most signifi cant criterion for investors in all stages of business life cycle is the potential for maximizing the value of co-ownership share. The signifi - cance of the criterion is further refl ected in the low standard deviation. The results received in this research are in this respect identical with results published by Eisele et al. (2002), who claims that market value growth of co-ownership share is a strong motive aff ecting decision making of profi t-oriented investors of Private Equity and Venture Capital. However, it is necessary to mention results of studies which highlight the fact that ‘investors fairly o en do not trust excessively optimistic business proposals concerning expected income and therefore pay more attention to an expected market growth rate and are interested in whether the product satisfi es the needs of existing or emerging markets’ (MacMillan et al., 1985, 1987; Zacharakis, Meyer, 1998). The possibility of quick and trouble-free sale of capital interest is a criterion to which below-average