Venture Capitalist Criteria
Every entrepreneur seeking funding faces the problem of how to impress a venture investor enough to receive an investment. Each venture capitalist, whether investing for a venture capital fund or making an investment with his own private capital, looks for a few basic criteria that he will use, after doing exhaustive due diligence, to evaluate whether to invest in a company.
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Large Lucrative Market
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Venture capitalists want to invest in companies that are likely to be doing at least $100 million in revenues within five years after investment. For a startup or emerging growth company to hit that revenue goal, the industry must be large and active enough to support that scale of business in a young company. This means the industry should produce more than $1 billion in business transactions yearly. Most venture capitalists are only interested in investing in the newest, fastest-growing industries, such as nano-technology, telecommunications, biotech or any other industry where new developments are creating rapid change and increasing prospects for future growth.
Quality of Management
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Venture capitalists look for entrepreneurs who have assembled a management team with significant work experience in the industry. If an entrepreneur cannot convince other people to help develop his company and has not provided knowledgeable people in key areas such as accounting, manufacturing, marketing and fulfillment, the venture capitalist probably will reject the investment because the entrepreneur is too inexperienced a leader to build a successful company. However, if the entrepreneur demonstrates an eagerness to follow suggestions and learn new skills, the venture capitalist might decide to help fill out the management team with appropriate people.
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Breakthrough Idea or Technology
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Most venture capitalists are looking for extraordinary returns on their investments of anywhere from a few times the total investment amount to 30 times investment, or 3000 percent. No ordinary business idea is going to achieve such returns, so the investment must be in a company that has created a significant improvement or breakthrough technology that will dramatically change its industry or create a totally new industry. Private venture investors are more likely to accept more modest returns than will venture capital funds.
Competitive Advantage
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It is not good enough to have a logical business plan and breakthrough technology; a company also must have a marketing plan that will launch it rapidly into leadership in the industry. Every good idea will soon have many people trying to copy it, so the venture capitalist looks for patented technology, trademarks, brand recognition, extensive research and development necessary to duplicate the product or service; control of unusual knowledge or resources necessary for production; or great expense involved for a competitor to duplicate the business model. These elements create a high barrier to entry for any potential competitor.
Attractive Valuation to Investment
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The valuation of the considered company is a major factor in the venture capitalist's term sheet, which is the description of the amount of money to be invested, the ownership percentage and governance control the venture investor wants in return. Other requirements including management changes, exit strategy and benchmark goals also must be satisfied within a specified amount of time. The venture capitalist looks for maximum intrinsic value in a company being considered for investment.
Venture Funds
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Venture funds normally look for emerging growth companies that have already proved their business concept through a few years of successful operations and need investment to expand the company rapidly in order to maintain or achieve industry leadership. Their investment decisions are weighted toward the highest possible return on their investment within a short period of time. They normally are looking for a company that can be sold to a larger enterprise or that is suitable for a public issue of stock. Their initial investments are commonly more than $5 million, and they might participate with other funds in providing hundreds of millions of dollars in funding to a company.
Private Capital
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Venture capitalists who invest for their own portfolios are sometimes referred to as angel investors. Their investment goals are normally not as lofty as those of a venture capital fund, but they also invest much smaller amounts of money--ranging from a few thousand dollars to under $5 million. Private capital is much more likely to invest in startup companies, and some investors are more interested in creating a portfolio of venture investments that will provide a good income and can be sold or taken public at a later date.
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