Venture Capital Investment Criteria in the Intellectualized Economy

Abstract

The rise of so-called Unicorn ventures, startups valued to at least one billion US dollars, have raised questions regarding the models used to perform these valuations. Some investors proclaim that what we are seeing a new incarnation of the dot-com bust, while others claim new technology is allowing startups to create massive amounts of value in a shorter amount of time than ever before. This thesis seeks to understand the development of venture capital investment criteria since the dot-com bust, in order to understand the driving forces behind Unicorn valuations. Through a literature study and several in-depth interviews with venture capitalists in varying geographical regions, firm sizes, investments focus areas, and with varying experience, the study examines similarities and differences between the dot-com era and the situation of today. The findings suggest that venture capitalists ’investment criteria change depending on the amount of available capital in the venture capital funds. When the amount of available capital increases, venture capitalists seem to take larger risks, increase the valuation of their investment objects and use alternative metrics to argue for these higher valuations. Furthermore, some findings suggest that the intellectualization of the economy is creating a venture capitalist’s ideal investment opportunity, namely disruptive innovation or completely new markets, at a higher pace than ever before.