Venture Capital Investment Criteria

p When trying to raise VC funds, it really helps to understand how Venture Capital works, and what a VC firm expects. This article will give you important insights into venture capital so you can develop an effective venture capital campaign. You can go after venture capital in any growth phase, and the VC firm expects to participate in equity through owning stock, options, warrants and convertible debt or stock./p
pTo have a successful venture capital raise campaign, be sure you have a solid a href=http://www.businessconsultingabc.com/Writing_An_Effective_Business_Plan.html target=_blankBusiness Plan/a and a href=http://www.businessconsultingabc.com/Strategic_Plan_For_Business_Success.html target=_blankStrategic Plan/a in place. As a a href=http://www.businessconsultingabc.com target=_blankBusiness Plan Consultant/a with a background in private equity and business finance, I see many business plans, marketing plans and strategic plans that simply donrsquo;t meet muster. Give yourself the best chance possible by spending some time and effort in this area. Also, having a good Executive Summary and Investment Overview for an initial introduction to your business opportunity will serve you well./p
pstrongVC Risk Models/strong/p
p Venture capital wants to balance control with the amount of investment risk in a deal. Here are two ways VC firms asses and determine investment risk./p
pstrongemThe Risk / Return Evaluation/em/strong/p
pem– At the Product or Service Level:/em/p
ul
liLevel 1:nbsp; Idea Stage.nbsp; Not Operable.nbsp; Market Assumptions./li
liLevel 2:nbsp; Pilot/ Test Stage.nbsp; Market refined./li
liLevel 3:nbsp; Fully Developed.nbsp; Few Customers.nbsp; Market defined./li
liLevel 4:nbsp; Satisfied Customers.nbsp; Market Established./li
/ul
pem– At the Management Level:/em/p
ul
liLevel 1:nbsp; Entrepreneur./li
liLevel 2:nbsp; Few Founders./li
liLevel 3:nbsp; Partial Management Team./li
liLevel 4:nbsp; Full Management Team.nbsp; Highly Experienced./li
/ul
pstrongNote:/strongnbsp; The higher the Level from both Determinants (Product or Service amp; Management), the less Risk for a higher Return.nbsp; 4/4 would be most desirable and cost the Entrepreneur the least.nbsp; 1/1 would be the least desirable and cost the Entrepreneur the most.nbsp; A 2/2 or 3/3 are good Level Combinations to shoot for prior to approaching Venture Capital if financially practicable./p
pstrongemThe Present Value / Future Value Evaluation/em/strong/p
pem– Scenario:/emnbsp; Expected ROI is 35% per year, without inflation, over 5 years.nbsp; Present Value of Earnings is $4.5M.nbsp; Future Value Earnings in 5 years is $15M./p
ul
liVC Equity Share is calculated:nbsp; $4.5M divided by $15M = 30%./li
liMaximum Investment is 10 times first year gross (expected) earnings, which in this example is about $500,000./li
liemConclusions:/emnbsp; $5M maximum investment for 30% of the Company at 3/3 Level over a 3 year period.nbsp; A 1/1 Level, Seed/Start Up Investment would be a 45-50% Equity Stake, with an expected ROI of 60%./li
/ul
pstrongVenture Capital Objectives/strong/p
p Researching venture capital firms is perfectly essential to figure out precisely what they look for and expect in an investment, exactly what their investment parameters entail, and what the VC firm specializes in. Typically the fund will have a detailed website which will clearly explain their Fund Objectives. You will also find this critical information on their Offering Prospectus / Memorandum to their investors. Below I have outlined the different objectives of a VC fund to give you an idea what you need to find in your research./p
pstrongemInvestment Objectives/em/strong/p
ul
liRate of Return expectations./li
liLong- term or short- term capital appreciation./li
liEarly, Middle or Late Stage Companies./li
liSectors concerned in./li
liHigh growth potential./li
liLiquidity Options./li
liExpertise, Experience amp; repute of the Fund./li
liAdvisory Board Members./li
liMembers of the Fund./li
/ul
pstrongemInvestment Criteria/em/strong/p
ul
liEvaluate in terms of Management, Product, Markets, Financials, and Business Stage./li
liHighly competent and motivated management team./li
liProprietary Product or service that:nbsp; meets a strong market need:nbsp; Favorable price and cost relationship./li
liA market which has a favorable mix of Size, Growth, Competitive Barriers and the potential for high volume sales./li
liManagement:
ul
liPeople are the most important element in a Companyrsquo;s success/li
liBalanced Team/li
liSuperior Skills/li
liTeam leader with a track record/li
liAbility to keep and attract talent/li
liUnderstands Planning amp; Control/li
liCan make difficult decisions/li
liCan work with professional advisors/li
liAccept assistance from the Fund Members/li
liloyalty to the Venture/li
liClearly understands the Fundsrsquo; mentality on liquidity, rate of return and investment objectives./li
liAbove all, integrity, character, accountability and high business ethics/li
/ul
/li
/ul
pstrongemProduct or Service/em/strong/p
ul
liTypes of Products and Services in the Fundrsquo;s Sectors which are of interest./li
liCompetitive Edge:nbsp; Cost, Quality amp; Performance./li
liPremium prices achievable?/li
liHigh Yield Profit Margins./li
liDominate or Control a significant market share./li
/ul
pstrongemMarket/em/strong/p
ul
liYoung, flourishing fast and provides opportunity/li
liDefined market niche./li
liDominance in that niche./li
liNiche market should be small enough not to attract big company competitors, yet has a strong potential for expansion./li
liRealistic Marketing Plan./li
liMarketing Team leadership should have broad industry contacts with sales people, sales reps and distributors./li
/ul
pstrongemFinancial Outlook/em/strong/p
p(these are some example numbers that are based on a technology company)/p
ul
li$20M in Sales amp; Earnings, after taxes, within 5 years.nbsp; Generate Return on Assets greater than 20%./li
liVenture is not capital intensive./li
liProject prices amp; profit margins that can cushion early round obstacles./li
liReaching Break Even in 2 years./li
liIf it is a capital intensive deal, should be capable of adding substantial value early on and attract later on rounds of financing at higher pricing. /li
liMaximum of 10 to 1 return on investment for startups./li
liLiquidity in 5 years for startups./li
liLater stage companies: ROI of 5 to 1 in 5 years or 3 to 1 in 3 years./li
/ul
pstrongemStage/em/strong/p
ul
liMostly early stage but will consider later stage with high growth opportunities./li
liConsider small public companies as well as private./li
liSpin offs as a result of re-structuring and rejuvenation./li
/ul
pstrongemOperating Policies/em/strong/p
ul
liCan change at the fundrsquo;s discretion/li
liGeography:
ul
liAny geographic area but most companies are in the West andnbsp;Silicon Valley, China, Taiwan and Singapore./li
/ul
/li
liMonitoring Investments:
ul
liFree access to management/li
liFund receives Business Plan updates regularly/li
liFund will not seek majority ownership or run the venture/li
liHelp the venture attract Management to fill gaps and develop its business plan in the early stages of investment/li
liBoard Representation/li
liFund will provide expertise and assistance with securing key employees, filling management gaps, operational planning, key customer and supplier relationships, joint ventures, financing, security offerings, acquisitions and harvest strategies/li
/ul
/li
/ul
pstrongAbout The Guest Article Author ndash; Frank Goley, Business Consultant/strong/p
p strongemFrank Goley/em/strong has an experienced background as a business consultant, business turnaround consultant, business plan writer, business plan expert, small business consultant, business coach, business plan consultant, marketing consultant, business planner and online marketing consultant, and seo consultant for strongemABC Business Consulting/em/strong. He has been helping companies to succeed for many years. Frank wrote his first business plan over twenty years ago. He is an expert in developing business plans, marketing plans, funding plans, strategic plans, turnaround plans, web marketing strategies,nbsp;and project specific business plans. Frank is the author of a business plan book, strongThe Comprehensive Business Plan Workbook/strongem ndash; A Step by Step Guide to Effective Business Planning/em, and he has over 50 published articles and e-books on business success strategies. He also writes the Business Success Strategies Blog and publishes the Business Success Newsletter./p