Towards the development of an optimum model of the venture capital negotiation process

Abstract

Two problems relating to venture capital funding are first, that only a small proportion of entrepreneurs who apply for venture capital are satisfied with the deal that has been made and second, that the majority of entrepreneurs fail to prepare adequately for the pre-negotiation stage of venture capital negotiation. It is argued that: (i) What is negotiated during pre-negotiation is of great importance in determining the outcome of negotiation. (ii) The preparation for pre-negotiation forms an integral part of the negotiation process. (iii) Lack of preparedness for pre-negotiation results in a situation of asymmetry in respect of knowledge and negotiating power between the entrepreneur, who lacks experience, and the financier, who holds it. It is hypothesised that the initial asymmetry between the parties can be countered by the entrepreneur gaining knowledge about the three determinants of the outcome of the process, these determinants being: (a) acquiring knowledge about the process; (b) managing impressions; and (c) negotiating the nature of interdependence, the latter being superordinate to the two former determinants. Thus it is by the negotiation process itself that the initial asymmetry can be seen ultimately to be balanced. A proposed model of the venture capital negotiating process which features the forementioned determinants has been tested against information derived first from interviews and informal discussions in the workplace, second by analysing works in the literature, and third from the case study cited in this thesis.