Venture capitalists unlike banks are looking to provide funding to small businesses that look promising. Their main goal is to be able to resell their stocks after 5 or 7 years assuming the business has become successful. Bankers would request collateral from new entrepreneurs. Venture capitalists on the other hand, focus rather on the people who will manage the project.
Venture capitalists provide the funding to those projects that they deem promising after meticulous reviews. At the end only an average of 5 to 10% of all projects get funded.
A study done on 70 venture capitalists focused on analyzing the reasons behind the decision making process that these investors undergo in order to fund a project.
One of the factors is the related to the specific product that is being sold or the market. Including, how big the market is for the product, whether it has growth tendencies or if the activity is seasonal.
The other factor is relative to the ability of the business to be strategic and competitive. Venture capitalists analyze the level of competition, their relation with their suppliers and distributors, and whether they can stop new business from starting.
The management and the leadership abilities of the people in charge of the project or business is one of the most important factors for venture capitalists.
Other important factors are also competences in marketing, administration, organizational structure, sales, and production of the business.
The business also needs to be financially sound and have positive trends of development and return rates.
Funding is a factor that determines how the relationship between the investor and the company will be. This relationship is defined by the terms and conditions the both parties agree on. Venture capitalists manage their portfolio carefully in order to provide financing to the business according to the contracts they have with each.
In fact, all the above criteria are relevant regardless of the situation, we request funding to the banker, a venture capital company or a business angel etc. Only the weighting of these criteria will vary according to the expectations and needs of each person (whether a banker or a business angel).
For a venture capitalist the management skills, experience and vision of an entrepreneur are key factors for providing funding. They analyze the personality of the management and their ability to successfully handle the project.
Tags: Venture Capital
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