What does a Venture Capitalist look for?
Venture capitalists are higher risk investors and, in accepting these higher
risks, they desire a higher return on their investment. The venture capitalist
manages the risk/reward ratio by only investing in businesses that fit their
investment criteria and after having completed extensive due diligence.
Venture capitalists have differing operating approaches. These differences may
relate to the location of the business, the size of the investment, the stage
of the company, industry specialisation, structure of the investment and
involvement of the venture capitalists in the company's activities. The
entrepreneur should not be discouraged if one venture capitalist does not wish
to proceed with an investment in the company. The rejection may not be a
reflection of the quality of the business, but rather a matter of the business
not fitting with the venture capitalist's particular investment criteria.
Venture capital is not suitable for all businesses, as a venture capitalist
typically seeks:
Superior Businesses
Venture capitalists look for companies with superior products or services
targeted at fast-growing or untapped markets with a defensible strategic
position. Alternatively, for leveraged management buyouts, they are seeking
companies with high borrowing capacity, stability of earnings and an ability to
generate surplus cash to quickly repay debt.
Quality and Depth of Management
Venture capitalists must be confident that the firm has the quality and depth
in the management team to achieve its aspirations. Venture capitalists seldom
seek managerial control; rather, they want to add value to the investment where
they have particular skills including fundraising, mergers and acquisitions,
international marketing and networks.
Corporate Governance and Structure
In many ways the introduction of a venture capitalist is preparatory to a
public listing. The venture capitalist will want to ensure that the investee
company has the willingness to adopt modern corporate governance standards,
such as non-executive directors, including a representative of the venture
capitalist.
Venture capitalists are put off by complex corporate structures without a clear
ownership and where personal and business assets are merged.
Appropriate Investment Structure
As well as the requirement of being an attractive business opportunity, the
venture capitalist will also be seeking to structure a satisfactory deal to
produce the anticipated financial returns to investors. Entrepreneurs should
not view this as a negative though. No two deals are exactly the same and there
are many types of investment structures and mechanisms that can be used to
ensure that all of the parties involved end up with a satisfactory deal.
An Exit Plan
Lastly, venture capitalists look for clear exit routes for their investment
such as public listing or a third-party acquisition of the investee company.
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