Question

After reading the article "How Do Venture Capitalists Choose Investments?" posted on moodle and after reading chapter 7 'Analysis of VC Investments', summarize what are the key criteria a VC investor pays particular attention to before making a prudent investment decision. Any citation of real life data would be value adding!

Answer 1

Important Factors Venture Capitalists Consider Before Investing are:-

1. Innovative idea

Every new startup is the Uber of something, and it’s played out.

With less than 1 percent of all U.S. companies ever receiving VC money, you need to stand out, and the way to do that is by having something truly innovative and unique. You are only going to attract initial interest if your idea is something that the VC hasn’t been pitched several times already. “It needs to be new and something that no one has ever tried before, or succeeded at before. Something innovative with extensive research and development will enhance one's interest enough to at least look at the pitch.”

2. Communal benefit

Startups come and go, and while nobody has an exact percentage, most people put the startup failure rate between 80 and 90 percent. The few startups that experience massive success all solve a problem.

Uber made commuting much easier. Snapchat made communication easier. Airbnb made travel easier. You get the point through these examples.

Startups that bring value to the community and to humanity in general are sustainable. They solve a large-scale problem? Do they provide a benefit that a large percent of the population will desire to utilize? If the answer to those questions is yes, then they have a much greater chance of attracting interest".

3. Character of Business partners

The people behind an idea or company and, more importantly, their character is extremely important. You could have the best idea in the world, but it might never get off the ground with the wrong team in place.

“Their reliability, honesty, potential for a long-term relationship and work ethic all come into play. A team who understands their roles and performs them with love and enthusiasm is very hard to beat.

4.Capacity of the business partners

You can’t just fill startup roles for the sake of creating a team and launching. You need to make sure each person is highly qualified and possesses the ability to take the business to the next level. For example, a CFO with limited financial experience is a disaster waiting to happen, while a CMO with limited marketing experience is a severe handicap.

“There has to be a capable team with potential to grow the business and to carry it to high levels of success”. Experience and past track records play a major role in providing a little more confidence. Building the right founding team greatly increases the odds of securing VC money.

5.Financial outlook

VCs invest to make money. There is no other reason. It’s a business.

“The last thing one should look at is the financial outlook of the business, determining when it will start becoming profitable.” The deal needs to make financial sense and not tie up money too long. The goal is to recoup the initial investment and re-invest in another project.

Not every opportunity is going to produce overnight returns, and the risk versus the reward is always taken into consideration. While every deal is different, profit potential and the probability of a return on the initial investment is always analyzed heavily.

NOTE:- Citation of real life examples like snapchat and airbnb are itself inscribed in above answer.