The Role of Prediction in New Venture Investing

2005

Rob Wiltbank Richard Sudek

Early stage investors openly discount/ignore the predictions that entrepreneurs show in their business plans as they pitch to investors. At the same time, many predictions about the venture continue to anchor investor evaluations. However, investors’ use of predictive and non-predictive information varies based on their own approach to dealing with uncertainty, their own entrepreneurial experience, and the steps in the evaluation process (i.e. screening, due diligence, and funding). Evaluating data from more than 2,700 individual investor evaluations of 150 new ventures, we find that investors with more entrepreneurial experience are more effectual in how they approach the development of new ventures. We also find that investors grade their area of emphasis more stringently, i.e. those who weight predictive information grade it “tougher.” Overall, investors emphasize predictive information more than they might suppose, especially early in the selection process, but once a venture has moved through the funding process to due diligence and investment, non-predictive information is the key factor.

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