Understanding Venture Capitalists

Created on Saturday, 08 November 2008 04:04 Last Updated on Friday, 06 May 2011 11:37 Published Date Written by Small Business Can Hits: 1009

Venture capitalists generally invest other people's money. So they're accountable. Understanding what makes them tick is half the battle.

VC money is generally raised from various institutional and pension fund investors to back start-up and growing companies that show strong potential to develop and to turn a profit.

Most often, venture capitalists look for substantial returns making them more selective than, say, angels who may invest in smaller businesses.

They are most often seeking to invest in companies that will grow quickly and see large profit margins. Generally they invest in several businesses at a time to limit their risk.

VC firms usually specialize in certain sectors building up experience and expertise about what works and doesn't work in that sector. This allows them to hopefully pick winners based on educated opinion. It also allows the VC to become involved in the business, providing their experience and expertise in the industry.

In many cases, venture capitalists look at the long-term picture and if the business grows according to the plan, it may receive several rounds of funding.

There are also various types of venture capitalists. Some will focus on providing seed money for a new business venture, while others will come in only later on in the development of the business.

It is important that you research the investing criteria of a venture capital firm before approaching them.

It is also imperative that you be thoroughly prepared before appointments. This means you will need to present a well-honed business plan and, as is the case with most potential investors, be able to provide all the difficult requests and questions surrounding the business.

So:

Have a clear vision of the business and be able to articulate that vision

Understand potential obstacles that you may encounter and have answers and solutions.

Have a clear idea of how long it should take to show a profit. This must be illustrated in financials.

Present a strong, experienced management team. If the team has a hole or needs strengthening, make it part of the case for funding.

Providing a well-planned marketing strategy that defines your target market and how you plan to reach them . Plan is the operative word - have your strategies laid out, rationale for and a financed and timelined execution plan.

Demonstrate enthusiasm and confidence that your business can meet any challenges and succeed against them. Remember VCs are investing in you and your team.

Present a large market opportunity. Quantify it and qualify it. A large opportunity approached in a planned way equals large rewards.

Demonstrate you solutions IPR.

If a venture capital firm is interested in your business, it will do its own due diligence and evaluate the background and history of the management team, the financial projections, and the market in which the business is involved.

Be ready to hand over all documentation requested, ranging from your board minutes to recent contracts so that they can evaluate your business thoroughly.

If all goes well and a venture capitalist is interested in working with you, a term sheet will be issued. This includes how much the venture capitalist is willing to invest, the conditions of the investment, and how the money is expected to be used.