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The term "venture
capital" has been defined in many ways but generally refers
to relatively high-risk, early-stage financing of young emerging
growth companies. The professional venture capitalist is usually
a highly trained finance professional who manages a pool of
venture funds for investment in growing companies on behalf of a
group of passive investors.
What does a venture
capitalist look for in its prospective investments?
Regardless of the company's
particular stage of development, primary products and services,
or geographic location, there are several key variables that all
venture capital firms will consider in analyzing the business
plan presented for investment. The presence or absence of these
variables will ultimately determine whether capital will be
committed to the project. These variables generally fall into
four categories: (1) management team; (2) products and services
offered; (3) markets in which the company competes; and (4)
anticipated rate of return on investment.
In determining whether
a growing company would qualify for venture capital, its
management team must be prepared to answer the following
questions:
Management team.
What are
the background, knowledge, skills, and abilities of each member?
How is this experience relevant to the specific industry in
which the company competes? How are the risks and problems often
inherent to your industry handled by the members of the
management team?
Products and services.
At
what stage of development are the company's products and
services? What specific market opportunity has been identified
by the company? How long will this "window of
opportunity" remain open? What steps are necessary for the
company to exploit this opportunity? To what extent are the
company's products and services unique, innovative, and
proprietary?
Growing company
- targeted
markets and stage of development. At what stage of the life
cycle is the industry in which the company plans to operate?
What is the size of the company's targeted market? What is its
projected growth rate? What methods of marketing, sales, and
distribution will be utilized in attracting and keeping
customers? What are the strengths and weaknesses of each
competitor (be it direct, indirect, or anticipated) in the
targeted market? From a timing perspective, is this the
appropriate stage of development for the company to receive a
venture capital investment?
Return on investment.
What
are the company's current and projected valuation and
performance in terms of sales, earnings, and dividends? To what
extent have these budgets and projections been substantiated?
Has the company overestimated or underestimated the amount of
capital required for the growth and development of its business
plan? How much money and time has already been invested by the
owners and managers?
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