Question

The contribution of venture capitalists to the economic growth of a country cannot be over- emphasized. As a young entrepreneur with a business degree from a top-notch University in Ghana, vividly discuss the critical issues you will consider in choosing a venture capitalist to assist you roll out your pizza hut.

Answer 1

Solution:-

Venture capital is no doubt a very integral part of startup ecosystem, helping the budding entreprenurs to take the plunge and succeed, thus contributing to national growth, creating jobs, increasing output and helping in progress overall.

The critical issues that an entrepreneur should consider while choosing a venture capitalist in rolling out his business is as follows:

• The most important factor is the valuation of business at which the venture capitalist gets to invest. This is the single most important consideration as it will not only determine how much stake in the company the entrepreneur will have to part with, but also determines the benchmark for future funding rounds, and also the amount of capital he will be able to raise from the VC. the entrepreneur must make sure that the valuation used for raising funds is not less than the intrinsic value of the business considering the stage it is at and the progress made so far
• Another very crucial factor that must be considered is the sector expertise of the VC firm. If the business is in pizza sector (i.e. food and beverages) but the VC firm has expertise in only the pharma businesses, they would not be able to help with the technical expertise and experience that budding entrepreneurs look for at the early stages in their business journey
• The VC must see the vision of the entrepreneur and they must have same strategic views related to the industry and the company's growth path. A discrepancy in visions could lead to inefficient decision making and deadlock at company's managerial decisions
• The funding offered and stake agreed against it should be unconditional and must not be based on performance targets or future events. Further, any parts of the funding agreement that gives rights to the VCs to increase their stakes in future based on certain performance targets being missed or without offering additional consideration in general should be avoided as this would dilute the ownership of founders in the company