Venture Capital

About Venture Capital

Venture capital is a means of equity financing for rapidly-growing private companies. Finance may be required for the start-up, development/expansion or purchase of a company. The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken.

Advantages of VC
Venture capital has a number of advantages over other forms of finance, such as: It injects long term equity finance which provides a solid capital base for future growth. The venture capitalist is a business partner, sharing both the risks and rewards. The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies. The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners etc The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth.

How does the VC industry work?

Venture capital firms typically source the majority of their funding from large investment institutions such as fund of funds, financial institutions, endowments, pension funds and banks. These institutions typically invest in a venture capital fund for a period of up to ten years.
To compensate for the long term commitment and lack of both security and liquidity, investment institutions expect to receive very high returns on their investment. Venture capitalists invest in either companies with high growth potential where they are able to exit through either an IPO or a merger/acquisition. Venture capitalists are therefore in the business of promoting growth in the companies they invest in and managing the associated risk to protect and enhance their investors' capital.

Selecting the VC
Venture capitalists have preferences for particular stages of investment, amount of investment, industry sectors, and geographical location.
It is important to select venture capitalists with whom it is possible to have a good working relationship with a long term horizon.

Check on an investor's ability to invest in additional financing rounds if required is also important.
The entrepreneur should consider the additional value that the venture capitalist can bring to the company. These skills may include industry knowledge, fund raising, financial and strategic planning, recruitment of key personnel, mergers and acquisitions, and access to international markets and technology.

What do VCs look for

The venture capitalist manages the risk/reward ratio by only investing in businesses which fit their investment criteria and after having completed extensive due diligence. Venture capitalists have differing operating approaches. These differences may relate to location of the business, the size of the investment, the stage of the company, industry specialization, structure of the investment and involvement of the venture capitalists in the companies activities. Venture capital is not suitable for all businesses, as a venture capitalist typically seeks :

Superior Businesses Quality and Depth of Management Appropriate Investment Structure Exit Opportunity

The business Plan

Venture capitalists view hundreds of business plans every year. The business plan must therefore convince the venture capitalist that the company and the management team have the ability to achieve the goals of the company within the specified time. The business plan should explain the nature of the companys business, what it wants to achieve and how it is going to do it. Essential areas to cover in your business plan : 1. 2. 3. 4. 5. 6. 7. 8. Executive Summary Background on the company The product or service Market analysis Marketing The management team Financial projections Amount and use of finance required and exit opportunities

Investment Process

Initial Review of Proposal by VC.

Discussions with Entrepreneur and Management team Preliminary Screening Negotiating Investment Approvals and

Disbursement of Investment