Venture capital firms and individuals are interested in many of the same
factors that influence bankers in their analysis of loan applications from
smaller companies. Though banks look at the immediate future of a small
company, they are most heavily influenced by its past. Venture capitalists
look at the long-term future of the company. Banks are creditors while
venture firms are owners. They hold stock in the company, adding their
invested capital to its equity base. Therefore, they examine existing or
planned products or services and the potential markets for them with extreme
care. They invest only in firms they believe can rapidly increase sales and
generate substantial profits. Venture capitalists look more closely at the
features of the product and the size of the market than do commercial banks.
Venture capitalists invest in long-term capital and not for interest
income. They look for three to five times their investment in five or seven
years. The job of the venture capitalists is to find venture projects with
this appreciation potential to make up for investments that aren't
successful.
It's difficult to forecast the productivity of an early stage company.
Hence, these venture capitalists set rigorous policies for venture proposal
size, maturity of the seeking company, requirements and evaluation
procedures to reduce risks, since their investments are unprotected in the
event of failure.
Most venture capital firms' investment interest is limited to projects
proposed by companies with a sound operating history. Profits made by those
companies aren't given much precedence before an investment decision is
made. Companies that can expand into a new product line or a new market with
additional funds are particularly interesting. The venture capitalists
provide funds to enable such companies to grow in a spurt rather than
gradually as they would on retained earnings. There re a large number of
start up companies that get financial help from venture firms. Venture
capitalists see that capital investment analyses and capital source studies
are planned 5 years ahead. The investment analyses should compare rates of
return for product, market, or process investment, while the source
alternatives should compare the cost and availability of debt and equity and
the expected level of retained earnings, which together will support the
selected investments. These analyses! and source studies should be prepared
quarterly so you may anticipate the financial consequences of changes in the
company's strategy.
But a structured financial planning doesn't guarantee that you'll be able
to get capital from a venture firm. Not making them, will virtually assure
that you won't receive favorable consideration from venture capitalists.
