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Venture Financing

Raising Venture Capital for Your Start-Up Venture

What Are the Venture Capitalists' Investment Criteria?

By: EUREKA Venture Capital, Belgium

Virtually all venture capital firms are investing "other people’s money" money raised from pension funds, banks, university endowments, insurance company investment arms, and so forth.

To be attractive investment vehicles in themselves, these venture capital firms must be able to promise and deliver a rate of return that is more attractive than those available in markets for publicly traded stocks and other securities.

 

Venture capital investment criteria are quite straightforward.

  • Does the company serve a market that is large enough and fast growing enough to be interesting and promising?

  • Does the company's product or service have a clear, distinct advantage in its marketplace?

Sustainable Competitive Advantage

  • Does the company, through intellectual property or other means, have sufficient barriers to the entry of other competitors who can duplicate their advantage?

  • Does the company have a skilled, honest, realistic, seasoned venture management team with the ability to carry out the business plan and to responsively weather unanticipated problems and opportunities that arise along the voyage to success?

  • Are the company's customers pleased with the product or service, or with its early versions, and are they likely to become repeat customers?

     
  • Is the valuation of the company and the terms of the equity investment offered, attractive enough to warrant the risk involved in the investment?

Of all of the above, the need for a strong management team is by far the most critical.

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For a venture opportunity to be attractive there must be a positive answer to all of these questions. But venture investors will spend most of their time verifying the quality of the team of managers who will be spending their money.

When you deal with venture capital investors, it is crucial to understand that their own lifetime and risk strategy are going through their minds.

Venture capitalists hope to be able to sell their stock in three to seven years, at or after an exit event (this is referred to as “harvesting”). Venture capitalists know that not all their investments will pay off. The failure rate of investments can even be high; anywhere from 20% to 90% of the enterprises funded, fail to return the invested capital. If a venture fails, the entire funding by the venture capitalist is written off.

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