Last week, one of my friends asked me the kind of personality traits venture capitalists look for in entrepreneurs. Based on my observations over the year of meeting both venture capitalists and entrepreneurs, I have maintained a mental list. Three traits that venture capitalist are looking in entrepreneurs are:
Venture capitalists always look for tenacious entrepreneurs. Tenacity comes up as one of the most critical ingredients to realizing success in entrepreneurship. Venture capital firms such as ENIAC Ventures look for the ability of the founders to break through walls. Start-ups have many ups and downs, and entrepreneurs must overcome every challenge.
Clarity of thought
A straight line between a solution and a problem shows a mastery of information that presents a person as an entrepreneur who knows his or her stuff. Venture capitalist wants entrepreneurs who understand their industry and entrepreneurship in general.
Venture capitalist evaluates why an entrepreneur is interested in solving a particular problem. Some VCs like funding entrepreneurs who are trying to solve personal problems. The conviction to find a solution for a particular problem is stronger when an entrepreneur is passionate about it.
References https://www.entrepreneur.com/article/294701 https://www.inc.com/bill-carmody/5-qualities-vcs-look-for-in-an-entrepreneur.html
Before we define Venture-Capital-Backed IPO, it is important to understand initial public offering or IPO. IPO is the very first sale of shares issued by a company to the public.A company is considered private before an IPO, with a few f shareholders made up mainly of early investors and professional investors.
Venture-Capital-Backed IPO is the selling of shares in a company to the public that has earlier been funded by venture capitalists. The alternative toventure-capital-backed IPO is an acquisition. Known as exit strategies, both options allow entrepreneurs and venture capitalists get money out of their investments. Open Table and Tesla Motors are examples of companies that were formerly venture-capital-backed IPOs.
Many sources regularly report on venture-backed IPOs. In lean economic periods, there are fewer venture-capital-backed IPOs due to low investor confidence. Afterthe financial crisis, the period between 2008 and 2009 was characterized by low numbers of venture-capital-backed IPOs.During that period only 10 VC-backed companies went public.
According to Grabow, about 39 VC-backed companies had an IPO in 2016. Of these companies, 13 venture-backed IPOs were tech, according to Shoshanna Delventhal of Investopedia. Today, there are about 17,000 VC-backed companies. It is expected that this year will see many venture-capital-backed IPOs.
An important feature of venture capital investing is the exit strategies. Exit strategies take on various forms, but it is essential that a startup put one in place for its VCs. The exit occurs in the form of liquidation or disinvestment in the final stage of the venture capital funding. The main types of disinvestment/liquidation are trade sales, IPO, write-offs, and Buyback.
In this type of strategy, a company is merged with an acquirer or sold for cash, stock, or a combination of both.
If the company has performed well, the venture capitalist will take the IPO route. This involves issuing shares that are registered for the public offering. The venture capitalists get their portion of shares and put them in the open market for trading.
Write-offs are voluntary disinvestment that may or may not result in proceeds.
In this strategy, the entrepreneur buys back the investment share from the VCs. The entrepreneur takes the company back to being a privately held company.
Apart from the above four types of disinvestment, bankruptcy is another options. The company or firm may just go bankrupt.
The goal of venture capitalists is not to maximize all risks. Instead, they try to understand all risks in a business and weigh those risks with the return- the exit. Here are some risks that venture capitalists review:
Market timing risk
Venture capitalists ask themselves whether the business has been established at the right time. Although this risk is difficult to evaluate, it is an essential consideration. There are numerous stories of individuals saying they had the idea behind the Facebook establishment. But the market was not yet ready for it.
Business model risk
Before funding a start-up, venture capitalists must satisfy themselves that the start-up has a clear business model. The unit economics must seem to work. If not, there must be assumptions necessary to achieve profitability.
Market adoption risk
Venture capitalists look at the competition in the market. They are more likely to fund start-ups where there are no strong competitive players in the market. They also look at the barriers to entry.
To get funds from venture capitalists, a business must have a team with passion and right skill to reach their gold. If there are no skilled individuals, the team must be willing to find others to complement their skills.
Other risks that are evaluated by venture capitalists include technology risk, capitalization structure risk, platform risk, venture management risk, financial risk, and legal risk.
References http://tomtunguz.com/the-11-risks-vcs-evaluate/ http://www.investopedia.com/articles/financial-theory/11/how-venture-capitalists-make-investment-choices.asp
There is something exciting about entering a partnership with venture capitalists. For a start-up, partnering with a venture capital firm is a sign of success. Venture capital firms have capital that injects new lifeblood into the business growth of a start-up company.
Before entering into initial conversations with any of investment firm, a start-up company should thoroughly research all possible venture capital firms. When choosing the right venture capital firm, here are several things to keep in mind:
Consider the Strategy of your investment
First, ensure your company will derive benefits from a VC firm. Normally, venture capitalists bring major changes to the start-up. Terms of such partnership, for example, could warrant a 20 percent ownership in the company.
Go for established firms
Look for reputable capital venture firms that have already experienced success in a specific market. Although this will require you to do in-depth research, finding a venture capitalist that have a depth of industry knowledge will pay off in the end.
Look for perfect match
A good fit between a start-up and a VC firm is multi-faceted. It is all about getting an investor who has had success in your specific market and has relevant expertise.
References http://vennli.com/6-things-to-know-about-picking-the-right-venture-capital-firm/ https://bothsidesofthetable.com/what-i-would-look-for-when-choosing-a-vc-knowing-what-i-know-now-fbdc67689449
A business plan that is created to seek funds must demonstrate the prospects for profit. Entrepreneurs must show that their ideas will be profitable. They also need to show the amount of profit and when they will make enough profit to make the business worthwhile.
Any business plan should have the same basic elements. It should include product description and unique benefits it offers. The plan should also contain a marketplace overview that discusses the need in the marketplace for the product you or service you intend to sell, information about the competition, a description of the target customers, factors that will influence your customers, and projected marketplace trends in sales. Also, include your expertise for running the company, a budget, your market strategies, and financial projections.
If the capital is for a new business, any VC will need to see the business start-up costs. These are the costs that an entrepreneur need before he/she start selling. These costs include business set-up costs, deposits or payments for rent, research and development cost, costs to buy and outfit a building, and professional services fees.
If your business has been running for several years, venture capitalists will need to see operating costs. If you want to get expansion money, it is important to include operating costs for the last three years. This will allow investors to assess your ability to generate profit.
References http://smallbusiness.chron.com/role-business-plan-getting-venture-capital-funding-59646.html http://www.whiteboardmag.com/how-to-write-business-plan-vc-business-angels/
Those interested in venture capital are expected to familiarize themselves with some venture capital terms. These terms include:
Accredited investor– This is an investor with a special status under financial regulation laws
Angel investor– this is an officially recognized investor who use their finances to invest in a startup. Unlike large VCs, they work in small groups or even alone. They are mostly interested in the startup in the earliest stage.
Benchmark- this is the measure used to determine whether a start-up qualifies for more investment money. This is done by determining whether the startup has met its performance goals.
Cash position- this is the sum of the cash at hand and the assets referred to as highly liquid. (Short-term Debentures, CDs, among others)
General partner- this is a partner whose role is to oversee the day- to- day running of the VC firm. They are also referred to as managing partners.
Limited partner- Limited partners are those partners whose role is to invest their finances in the VC fund. They are not involved in the day-to-day running of the firm.
Merger- mergers occurs when two companies consolidate into one company for a given purpose, which may include obtaining a large market share, acquiring some given technology, among others.
ROI-Return on Investment- this is the ratio of some funds invested in a given project to the amount realized from the project (gain or loss)