Analysing venture capital

Venture capitalists need to be as a good at analysing their clients as any psychiatrist, says Dr Mike Hirshorn, a medical doctor turned venture capitalist, now with Sydney-based VC Nanyang Ventures.

To assess whether to invest in a young biotechnology company, Hirshorn spends at least four hours with the management team, including the CEO and managing director.

"It's a screening tool," he says.

Hirshorn says there are many levels to the screening process. He receives hundreds of applications for venture capital funds each year and only one in every hundred is successful.

He first assesses the technology, than the business, using the Bell-Mason diagnostic test, and next he visits the management team to assess how well they work together as a team.

Hirshorn says he will request that the CEO performs a personality test, if he is still not certain about investing in this company.

"We do a psychological profile for numerical reason, verbal reason and abstract thinking and that gives us a bit more background about the CEO," he says.

"We look at the relationship we have with that company to project how that company would relate in relations to others," he says. It's a bit like a psychiatrist using his relationship with his patient to predict how he or she will relate to others.

"It's amazing how these super-intelligent guys who run hugely successful companies get really nervous when I start to talk about doing personality tests," he says.

"And of course," he says, "we look at the company's cash and financeability as well as the potential return in the time frame."

The objective of a VC company is to make a return for its investors by buying and selling equity in private companies, with an exit expected within five years.

"It takes a certain personality type to be a venture capitalist," Hirshorn says. "You can end up having a love affair with the company in which you invest."

This relationship becomes a problem when the investor develops unrealistic expectations for the company.

"There is often an independent committee to keep it (the affair) under control," he says.

Hirshorn says there are many myths surrounding venture capitalists, including that they only want to make a quick buck and drive red Ferraris. But that's not the case, he says.

He claims making sure the company meets its milestones is a hard road, and that in the end venture capitalists don't make much return from their venture companies' successes.