Venture investors – what they are looking for in a company?

Venture investors are professional investors. Their main goal is quick and high returns. Accordingly, they are looking for the companies, which are capable of delivering both. Those would be companies that have high probability and potential for an exit within 3-5 years. The exit event can be initial public offering, sale of the company, merger, acquisition, or other event that provides liquidity. The rate of return they are looking for is in in the excess of 40% growth over the next 3-5 years. Considering that venture investors invest in multiple companies simultaneously, the chances are that not every company on their portfolio delivers as projected. High returns from the winners are supposed to cover the losses plus generate certain profits. Venture capitalists usually invest a substantial amount of capital, starting with $1 million and more. They are not interested in seed investments, which are more relevant for angel investors. Thus, before seeking venture capital, an entrepreneur should consider whether his business meets criteria used by most venture capitalists.

 

Usually venture capitalists focus on certain industries. Those will be listed on their websites. It may be a waste of time to pitch a venture capitalist if your business is simply not in the area of interest for that particular company. Recently the priority industries were information technology, digital media, internet services, life science, alternative and renewable energy, consumer products, business services and others, which have potential to bring high rates of ROI.

 

When deciding whether to invest, venture capitalists will evaluate the team as much as they evaluate the product/service. The opinion was that a good team could remedy the defective business model, while a bad team can ruin the best concept. Also if the core of the team is strong but certain skills are missing, the venture capitalist may bring their own professionals to help the business grow.  Then, venture capitalists will inevitably engage in the process of due diligence. They want to weigh their risks against the potential benefits. Times are long gone when money was given to the bright individuals. Nowadays venture capitalists want to see a strong business structure in full compliance with all legal requirements. First of all, there must be a company to invest in. The roles, rights and responsibilities of all founders should be properly documented. All intellectual property if any should belong to the company, and to the individual founders, but certainly not to the employees or independent contractors. If registration is an option, all IP should be properly registered under the company’s name. If it is not subject to registration for various reasons, assignment agreements from each party who might work on the creation or amendment of the IP must be obtained. Probably no need to say that if the business activity requires a license from the state or federal authority, those must be obtained as well. Other legal matters may require attention depending on the nature of the business. Venture capitalists receive thousands of proposals and they are not going to wait for months until entrepreneurs put their paperwork in order. The company should be “investment ready” before its founders approach venture capitalists.

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