Criteria of Venture Capital

Most venture capital firms focus primarily on the competence and character of the management of the company proposing. They believe that even mediocre products can be successfully produced, promoted and distributed by an experienced group of energy management. They know that even great products can be ruined by bad management.

Next in importance to the excellence of the management group of the proposing company, most venture capital firms look for a distinctive element of the strategy or product / market / process combination of the company. This distinctive feature may be a new product or process or any particular skill or expertise of the management. But it must exist. You must provide a competitive advantage.

After exhaustive investigation and analysis, if the venture capital firm decides to invest in a company, who will prepare a proposal for equity financing. This details the amount of money you pay, the percentage of ordinary shares to be sold in exchange for these funds, the method of interim financing to be used, and protective covenants to be included.

The final funding agreement will be negotiated and generally represents a compromise between the management company and the shareholders or managers of venture capital. The important elements of this compromise are ownership and control.

Property

Venture capital financing is not convenient for the owners of a small business. The company receives a share of the venture capital business in exchange for their investment.

The percentage of equity varies, of course, depends on the amount of money provided, the success and business value and return on investment expected. It can vary from about 10% in case of an established, profitable company as much as 80% or 90% for the commencement or financially troubled companies. Most companies risk, at least initially, did not want a position of more than 30% to 40% because they want the owner to have the incentive to continue to build the business.

Most of the enterprises to determine the hazard ratio of funds provided to equity requested by a comparison between the present value of the financial contributions of each party to the agreement. The present value of the contribution by the owner of a financially troubled company is obviously starting or low priced. Often it only calculates the present value of their idea of ​​time and competitive cost of the owner. The contribution by the owners of a thriving business is valued much higher. In general, it is capitalized at a multiple of current earnings and / or equity.

Financial evaluation is not an exact science. The compromise on capital contribution in the contract of the owners of equity financing is probably less than the owner thinks it should be and higher than that of the partner company's capital that could be. Ideally, the two parties to the agreement are able to do together what they could not do separately:

1. make the company grow faster with the additional funding to more than overcome the loss of the owner of equity and

2. investment grow at a rate sufficient to compensate venture capitalists for assuming the risk.

An equity financing arrangement with a result in five to seven years that appeals to both parties is ideal. Since the parties can not see this outcome in the present, will not be perfectly satisfied with the compromise reached. The entrepreneur must carefully consider the impact of the ratio of funds invested in the property given up, not only for today but for years to come.

Control

The partners in a venture generally have little interest in taking control of the business. They have neither the expertise nor the managerial staff to perform a number of small enterprises in various sectors. They much prefer to leave operational control for the existing management.

The venture capital firm, however, want to participate in strategic decisions that could change the basis of product / market character of society and in all major investment decisions that might divert or deplete the financial resources of the company.

Venture capital firms also want to be able to take control and groped to save their investments, if serious financial, operational, marketing or development. In this way, which usually include protective covenants in their agreements equity funding to allow them to take control and appoint new officers if financial performance is very poor .......