A Theoretical Framework To Analyze The Matchmaking Process Of Early Stage Venture Capital Investment

Abstract

The venture capital (VC) investment process has remained largely unchanged over the last several decades. Since the tech bubble burst in the early 2000s, we have seen a considerable increase in capital going into early-stage startup investment. We have also seen the number of exits (mergers, acquisitions, and IPOs) and funding rounds increase at a commensurate rate. However, a critical aspect of the venture capital funnel has seen a steady decline over the last few years. The cumulative number of early-stage startups receiving funding has decreased even though the amount of capital being put into these companies has risen steadily over the same period. This paper uses a theoretical framework grounded in behavioral economics and informed by anecdotal evidence from practicing venture capitalists to gain insight into the early stage investment process. We propose process interventions to the matchmaking process to alleviate inefficiencies uncovered during the research phase of the project. These interventions were designed with respect to key considerations put forth by practicing early stage venture capitalists. Finally, we highlight the real-world limitations of these process recommendations as well as possible avenues for future work.