Free Book: How to Raise Venture Capital Money The Easy Way

How to Raise Venture Capital Money

A Step by Step Guide to Attracting investors and Investments

To be sure, venture capital firms and individuals are interested in many of the same factors that influence bankers in their analysis of loan applications from smaller companies. All financial people want to know the results and ratios of past operations, the amount and intended use of the needed funds, and the earnings and financial condition of future projections.
But venture capitalists look much more closely at the features of the product and the size of the market than do commercial banks.

2. What Venture Capital Firms Look For
Banks are creditors. They're interested in the product/market position of the company for assurance that this product or service can provide steady sales and generate sufficient cash flow to repay the loan. They look at projections to be certain that owners/managers have done their homework.
Venture capital firms are owners. They hold stock in the company, adding their invested capital to its equity base. Therefore, they examine existing or planned products or services and the potential markets for them with extreme care. They invest only in firms they believe can rapidly increase sales and generate substantial profits. The reason for this is that venture capital firms invest for long-term capital, not for interest income. A common estimate is that they look for three to five times their investment in five or seven years.
Of course, venture capitalists don't realize capital gains on all their investments. Certainly they don't make capital gains of 300 to 500% except on a very limited portion of their total investments. But their intent is to find venture projects with this appreciation potential to make up for investments that aren't successful.

Venture capital is risky due to the difficulty of judging the worth of a business in its early stages.  Therefore, most venture capital firms set rigorous policies for venture proposal size, maturity of the seeking company, management of the seeking company, and "something special" in the plan that is submitted. They also have rigorous evaluation procedures to reduce risks, since their investments are unprotected in the event of failure.

3. Size of the Venture Proposal.
Most venture capital firms are interested in investment projects requiring an investment of $500,000 to $5,000,000.  Projects requiring under $500,000 are of limited interest because of the high cost of investigation and administration; however, some venture capital firms will consider smaller proposals if the investment is intriguing enough.
The typical venture capital firm receives over 400 proposals a year. Probably 90% of these will be rejected quickly because they don't fit the established geographical, technical or market area policies of the firm - or because they have been poorly prepared.
The remaining 10% are carefully investigated. These investigations are expensive. Firms may hire consultants to evaluate the product, particularly when it is the result of innovation or is technologically complex. The market size and competitive position of the company are analyzed by contacts with present and potential customers, suppliers, and others. Production costs are reviewed. The financial condition of the company is confirmed by an auditor. The legal form and registration of the business are checked. Most importantly, the character and competence of the management are evaluated by the venture capital firm, normally via a thorough background check.