Characteristics of Venture Capital Firms and Investment Appraisals: Australian Evidence

This study examines the characteristics of the venture capital industry in Australia. Our analysis is based on responses by thirty-two venture capitalist firms to a comprehensive questionnaire conducted in 2001. We observe that, on average, a venture capital firm has been operating for five years and consists of six investment executives with two specialist investment executives. Each firm has, on average, two formal layers in its investment decision-making process indicating two checkpoints to control risk. With respect to investment appraisal issues, it was noticed that the valuation methods based on discounted cash flows, recent transaction prices for acquisitions in the sector and capitalized maintainable earning (EBIT multiple), are the most important valuation techniques. It was further found that the resolution of information asymmetries through the overall coherence of the business plan and the venture capitalist’s own due diligence report were important across the industry when preparing a valuation. Venture capital firms sought to meet a standard benchmark rate of return on equity, on average, the target rate of return was 29% p.a. after tax. Several factors that would lead to vary targeted rates of returns were investigated as well.