What do Venture Capitalist Look for?

Monday December 29th, 2003

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Venture capitalists analyze business performance measures and generally evaluate future projections based on the management team.

Venture capitalists and angel investors may analyze some of the same issues as lenders when reviewing whether of not to invest in a business. These factors include a company’s past performance, the intended use of requested funds, the viability of a projected market and the quality of future projections. However, venture capitalist and other equity providers look much more closely at the features of a proposed product and the size of the market than do commercial banks.

Banks are creditors and are looking for service or product to provide sufficient cash flow and sales to ensure repayment of a loan. By contrast, equity provides are owners, holding an equity interest in a company. Their investment decision is made on the basis of whether of not a company can grow rapidly, with the potential to generate significant sales and result in large profits. They will be most interested in companies with new products or business models with the potential to see appreciation of at least 300-500 percent within seven years. Most venture capitalists make investments in the $250,000 - $1.5 million range. Investments are rarely made under this level, as it can cost several thousand dollars to undertake a preliminary review of possible investments and smaller investments often are not cost-effective.

The following are the factors venture capitalists often consider:

Management Skill – Most venture capitalists will focus on the experience and skill of the company’s management team. Venture capitalists often "bet the jockey, not the horse" – focusing on management capability, often more than products or services. In general, venture companies are looking for companies with experienced senior management, with defined roles and responsibilities and with a clear understanding of the market.

Competitive Advantage – Most venture capitalists are looking for a unique characteristic in a company’s business plan – something that provides the company a clear competitive advantage, either through the product, market or business process.

Performance History – Venture capitalists also will look at the performance history of the company making the proposal. While some equity providers look at companies that are just starting out, many more are interested in existing companies moving into new markets or expanding their services or products.