To Avoid Failure - An empirical study of common factors for failures in the Swedish Venture Capital industry

Abstract

Background and academic problem The industry of venture capital is characterized by high risk and potential high returns. Required return is the most common criteria measuring if an investment is successful or not. However, according to research, eight out of ten investments fail when measured by the required return. Various academic articles, thesis and studies have been written about the success of venture capital. On the other hand, the area of unsuccessful investments and what factors contribute to unsuccessful outcomes is poorly researched. Purpose The purpose of this thesis is to describe common factors for failure in the Swedish venture capital industry. Method This thesis uses a qualitative study approach where the empirics are gathered through interviews with venture capital firms with their main operations in Sweden. The theoretical part describes the decision process and the investment criteria used by venture capital firms when evaluating an investment using results of previous studies and stated theories concerning the subject. Result and study findings Most factors affecting the outcome negatively arise during the evaluation and deal structuring process. The criteria that cause most failures are the entrepreneur and the market. It has become evident through theory and empirics that it is the uncertainty regarding the competence, experience and personality of the entrepreneur as well as uncertainty about the market size and future growth that causes failures in the Swedish venture capital industry.