Important factors for selecting the venture capital by the entrepreneur are:
Just as the venture capitalist has to be careful in selecting his investment, the entrepreneur should also take several factors into account while selecting the venture capitalist.
Image Courtesy : ecell.in/Summit/images/home_images/3.png
The venture capital industry’s rapid growth over the past decade has meant that equity capital is available in unprecedented amounts.
IPO mania produced record exits for venture capital in 2019
It has also meant that the entrepreneur is faced with a bewildering choice between various sources of finance. Following factors are important in taking the decision.
1.Hands on or Hands off Approach:
The hands on style of management will normally involve a representation on the board. It would involve very active interaction between the entrepreneur and the venture capitalist.
An attempt is made to value add the services in an advisory role or active involvement in marketing, recruitment and finding technical collaborators. It will be a kind of active partnership between the two.
The hands off approach on the other hand would be passive and venture capitalist would just receive periodic statement of financial and other information.
Normally a right to appoint a director would be reserved but seldom exercised.
There is an intermediate style where the approach is passive except in major decisions like change in top management, large expansion, or major acquisition. A board appointee, if made, would in this case, perform a role of a financial watchdog rather than involving in active management decisions.
2.Deal Structuring Flexibility:
The entrepreneur should seek out the fund which gives a package that best meets his needs.
You're about to be redirected
Some funds are very flexible in this matter and any surprise the entrepreneur with their generosity. Others have some rigid rules and there are various approaches between these two extremes.
If the exit aspirations of the venture capitalist, whether it is buy back, or quotation or trade sale, are not clarified in the beginning, it may result in conflict later on.
There should be a clear understanding between the two in this matter and entrepreneur should make sure that exit aspirations does not compromise his interest.
4.Fund Viability and Liquidity:
The entrepreneur must sure that the fund has committed backers and not someone interested in just a quick realisation of capital gains.
This is very important in raising follow up finance.
5. Track Record of the Fund and Its Team:
Entrepreneur must look at the period for which the fund has been operational, the backed successful projects in the past or not, the objective of reward and return, and the experience of the team.
There should be good chemistry between the two.
Also the team must be committed full time and preferably have general management experience.
1. Character of the business partners
This will ensure continuous guidance especially in bad times.
Most venture capital companies do not want an introduction from anyone. A business proposal that is well prepared is the best introduction that one can have.
Most venture capital companies are interested in good investments and not in social contacts or introductions
A detailed and well organised business plan is the only way to gain a venture capitalists attention and obtain funding. They do not invest on a two page summary. They want a summary as a start but not as a substitute for a sound plan.
A well prepared business proposal serves two functions.
First it informs the venture capitalist about entrepreneur’s ideas. Second, it shows that the entrepreneur has thought out the intended business, and knows the industry and has thought through all the potential problems.
The summary should contain the name, address and telephone number of the contact person in a conspicuous location.
2. Capacity of the business partners
Briefly the type of business or nature of industry should be discussed. This should be followed by a thumbnail sketch of the company’s history to date.
The experience of the entrepreneur and the top management should be mentioned. A short description of product and service is required.
The amount of funds required and the form in which required should also be mentioned.
Summary of five years financial projections and five year history of existing group companies should be appended.
Also the exit plans must be mentioned.