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:
- management team;
- products and services offered;
- markets in which the company competes; and
- 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:
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?
What are your 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?
Recommended Books on Venture Capital Financing:
- Raising Venture Capital for the Serious Entrepreneur
- Venture Capital, Private Equity, and the Financing of Entrepreneurship
- Venture Capitalists at Work: How VCs Identify and Build Billion-Dollar Successes
- The Startup Game: Inside the Partnership between Venture Capitalists and Entrepreneurs
- Getting in the Game: Guiding Your Startup Through the World of Venture Capital and Angel Investors
Category: Finance a Business