2. What is Venture Capital?
Venture Capital provides long-term, committed share
capital, to help generally unquoted companies grow
and succeed. If you are looking to start up or
expanding a business, venture capital could help you to
do this. Venture Capital is invested in exchange for a
stake in your company and, as shareholders, the
investors’ returns are dependent on the growth and
profitability of your business.
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3. The Venture Viability Metrics
Rate
Ve
nt
ur
e
Re
Return tu
r n
exceeds cost
Cost of
capital Cost exceeds
Fund these ventures return
Funding not available
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4. Venture Financing
Nature of Risk
Financial Risks Strategic Risks
• Well developed • Credit • Market • Demand projections
risk management default demand often have little
practices and • Financial credibility
supporting market risks • Operating costs
• Operating costs often
industry • Interest rate changes
• Unexpected capital costs
are underestimated
• Risk financing • Currency/foreign
• Unforeseen capital
through exchange fluctuations
• Customer/industry costs can cause major
derivatives • Liquidity, changes problems
cash flow issues
Integrated • No risk finance or other
• Well-developed risk
• Property damage Risk • Information systems risk transfer methods
management
practices and • General liability/ • Accounting/
supporting industry legal risks control systems
• Developing risk
• Risk finance • Workers compensation • Key managers management field
traditionally through
insurance, but • Natural disasters • Supply chain • Some risk financing in
recently through business interruption
captives and capital insurance; risk transfer
markets products as • Business interruption through PEOs; business
well interruption services
Hazard Risks Operational Risks
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5. Would your company be attractive
for Venture Capital?
Many companies are “life-style” businesses whose
main purpose is to provide a good standard of living
and job satisfaction for their owners. These businesses
are not generally suitable for venture capital
investment, as they are unlikely to provide the
potential financial returns to make them of interest to
an external investor.
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6. Would your company be attractive
for Venture capital? Contd..
Venture Capital firms are interested in “Entrepreneurial”
businesses which can be distinguished from others by
their aspirations and potential for growth, rather than
by their current size. Such businesses are aiming to
grow rapidly to a significant size. Venture capital
investors are only interested in companies with high
growth prospects, which are managed by experienced
and ambitious teams who are capable of turning their
business plan into reality.
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7. What venture capital investors look for?
The expertise and track record of the founders and
management
The features and growth potential of the market
The synergy between the management, business
opportunity and the investors’ skills and investment
preferences
The financial commitment of the entrepreneur
The exit avenues
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8. How do venture capital firms evaluate?
Is the product or service commercially viable?
Does the company have potential for sustained
growth?
Does management have the ability to exploit this
potential and control the company through the
growth phases?
Does the possible reward justify the risk?
Does the potential financial return on the investment
meet their investment criteria?
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9. Critical factors for venture capital?
Reliable Idea: What makes an idea compelling to an
investor is that it reflects a deep understanding of a big
problem and offers a viable solution.
Market Opportunity: You should be targeting a sector
that is not already crowded and there is a significant
problem that needs to be solved, or an opportunity that
has not been exploited
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10. Critical factors for venture capital? Contd..
Competitive Advantage: Competition is not just about
direct competitors; it includes alternatives and other
better solutions.
Team: The promoters must have the ability to launch
the company and attract the good talent that is
needed to execute the idea successfully.
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11. Critical factors for venture capital? Contd..
Financial Projections: Your projections must tell your
story in figures—what drives your business growth,
what drives your profit, and how your company will
evolve over the next few years.
Validation: Is there any evidence that your solution will
be interesting for your target customers? Do you have
an advisory board of reliable industry experts?
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12. How to fine tune business plan?
A business plan should show potential investors that if
they invest in your business, you and your team will
give them a unique opportunity to participate in making
an excellent return.
It should be considered an essential document for
owners and management to formally assess market
needs and the competition; review the business’
strengths and weaknesses; and to identify its critical
success factors and what must be done to achieve
profitable growth.
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13. Broad Contents of Business Plan
The market
The product or service
The management team
Business operations
Financial projections
Amount and use of finance required
Exit opportunities
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14. Selecting a Private Equity Partner
Stage/type of investment
Industry sector
Amount of investment
Geographical location
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15. Keys to Success
• Understand Process
• Allot enough time to raise funds (6-8 mos)
• Timing and appropriateness of VC investment
• Stage investments to get maximum valuation
• Know limits of negotiation
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16. Useful tips
Be prepared that private equity investment is a highly
selective process – VC typically invest in only 2% to
5% of the opportunities they see, and they see a lot of
proposals. The proposals selected should have
potential for high growth in sales, profits and
shareholder value and have the management team to
achieve that growth.
VC are usually investing other people’s money and
that they are highly regulated to do their job properly.
They will need to have a detailed understanding of you
and your business before they invest – this takes time,
so you must need a lot of patience. The process of
raising venture capital will typically take 3 to 6
months.
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17. Useful tips contd..
Always keep in mind that VC back teams – rather than
individuals – so make sure you cover the entire key
management functions relevant to your business: e.g.
general management, marketing, sales, finance,
development, production, fulfillment etc. PE will be
looking for both breadth and depth of experience.
Don’t assume that VC know your products, sector or
industry, so keep it simple and avoid - or at least be
prepared to explain – any jargon. Don’t be afraid to go
right back to first principles if necessary.
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18. Useful tips contd..
Remember that you are selling a stake in your
company, so treat VC the same way you’d treat any
potential customer or commercial partner.
Be prepared to answer very detailed questions about
projected sales and their related direct costs, market
drivers, products, actual and potential customers,
pricing, volumes, sales and marketing strategy,
competition etc. – this is the heart of your proposal.
Get advice from a firm that understands venture
capital – in the long run it could save you time,
money and heartache.
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