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How Venture Capitalists Analyze Companies

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Case report: Venture Capitalist evaluations of potential Venture opportunities

What are the main requirements that these four VC look for when evaluating a new venture opportunity?

These VCs have analyzed and come to realize that the most important factor when evaluating a new venture is that there is an opportunity in a large market which is growing. VCs always ask and want to know where a company will be in the next 3-5 years. Usually, for a company to be successfully starting-up, they will have a constant revenue of a minimum of 100 million with a market potential of going up to 500 million dollars. This is for company’s with non-software based companies. When it comes to software based companies, investment can be lower in size.

The market size is very important for venture capitalists. They want the size of the markets to range between 500 million and 1 billion dollars to have enough potential to be interesting and worth taking the risk.

Venture Capitalists also primarily look for a key factor that seperates a company and its product apart from others. These factors can range from an advance in technology/ design/ engineering to having a tool that people are used to, a list of consumer’s in specific sectors, but scientific related start-ups are usually kept away from because consumers in general wait for new creations to be tested and aware of them before generating big amounts of interest.

Investors don’t only want a good idea with specific advantages to make a product/company stand apart. They will also look at the members that form these teams to see if they are reliable people. They want to invest in a company that will be stable and won’t give off a bad image to the public. The people that represent the company, are the image of the company which is a very important image to take care of. Investors want to know that someone who wants his product to be perfect is behind the start-up they are investing in. They don’t want a big CEO behind these start-ups because they do not have the set of mind which is right for this kind of sector, especially in a fast-growing start-up in these kinds of markets at these early stages.

Investors want to know how the company will increase the value it gets from its customers. Of course, lets not forget they obviously want to know what the initial costs will be to build whatever it is that the company is proposing and the requirements that are needed. A precise approximation of the costs that will be incurred with a safety net in case costs rise unexpectedly.

How do they mitigate the risks of their investments in new ventures?

Venture Caps attempt to mitigate risk, depending on the type of start-up by either giving low amounts of investment for a start-up to create a prototype, and make tests to see if the product actually has potential. Not all the time though is this possible. They are sometimes “obliged” to invest bigger amounts in times where there is a lot of competition and little time to get a product launched. When other Venture Cap firms are interested in somebody’s product, there is a lot of pressure on these investors because they don’t want to miss out on these opportunities, but at the same time they don’t want to make an impulsive decision which could backfire.

Investors also like to pay a close look at the financial plans of these companys. They initially want to know if the financials that are in the business plan are actually realistic and in line with the business itself. They don’t want to see start-ups with un-realistic numbers because this will show the team doesn’t really know what they are doing and what to expect in the business side of the company. This part is very important because it shows initially the seriousness of the company.

The financials of the company do not necessarily need to be really intriguing in terms of cost, (even though this can play in everybody’s favour). VCs are here to fund, so they just want to see a good idea with a realistic view of where this idea can go later on, without trying to fakely impress with numbers.

How do they think about the founding team? The founding team defines the company and it’s aim and mission. It is the roots and base of the company. Venture Capitalists like to meet the founding team members of small start-ups to have an idea of where the company will go, in reltation to the member’s attitudes and views of the companies. When we for example look at the facebook group, Facebook was defined by the way it launched and was created. Apple as well, created from Steve Jobs’ garage along-side his university friends. All these companies’ roots, have lasting effects and impact on the overall company, and to investors, this is very important because it shapes the way the company grows and expands.

Investors don’t want to see a bunch of kids arguing about a product, even though in this sector of start-ups, investors are usually prone to having to deal with very young entrepreneurs who have great ideas. Coming back to Apple again, this was the case.

VCs will want to know what exactly each team member does, and what their position is in the company. The kind of past experience they have, what the team thinks they are missing and will need.

The motivation behind starting the company (for the founders), how many employees are part of the company and what the team expansion plan is for the next year or 2.…...

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