5. Screening and Evaluation: Misguided Investigation of Entrepreneurial Firms

While venture capitalists focus on some of the key areas that result in entrepreneurial success and value creation, their screening and evaluation may often be incomplete and inadequate. In addition, when processing a venture capital deal, venture capitalists often enter into erroneous compensatory mechanisms to counteract weaknesses in one area with perceived strengths in another. Such compensations rarely work in practice. Venture capital decisions are further compromised by multiple biases that enter into decision making. Venture capitalists use cognitive shortcuts, which lead to poor investment decisions. They are also overconfident investors and “poorly calibrated” decision makers who demonstrate a high probability of making a wrong decision.