Venture capital is money that is privately given by outside investors (also known as venture capitalists) to finance a new business that shows great potential in becoming something big. The person who makes such investments will only require good returns for something which is pretty much high-risk. So what is it that venture capitalists look for when they look around for potential moneymakers?
How much and for what?
The first thing any investor asks for is what amount will be needed to get a business running. Although this is quite an awkward question, the reality is that any person seeking a venture capitalist must know exactly what he or she is going to spend for and how much will be spent. A venture capitalist looks for realistic numbers so that risks can be calculated. As a person proposing a business, one should know the market and the cost for providing for that market. This includes operating expenses, advertising expenses and even legal fees to make the business legitimate. Interestingly, venture capitalists also like to hear that large amounts of money will be needed. After all, the larger the investment will mean higher returns.
What are you selling?
Whether it’s a product or a service, a venture capitalist will always want to hear what it is specifically. This is because there might be similar products and services that are available out there that can pose as competition. Why would a venture capitalist invest in something like, for example, a website that sells music, if there are larger businesses out there that do the same thing already? A venture capitalist would rather invest in something that is unique but at the same time has a strong market potential. So if a business has a unique product or service, chances are that they will get a good investment. Of course, just because it is different does not mean that it will sell. A good business must know what product it sells and what market buys it.
Does it sell so far?
A smart venture capitalist will usually invest in something that already has some kind of market demand. This means that a business must already be making some kind of profit on its limited means. Usually, a venture capitalist will help boost productivity in a business that is already doing well for itself but needs more money to make its operations bigger. Businessmen will also stand a better chance of retaining a large portion of the company if the business is already getting decent revenues. This is important because venture capitalists in the long run end up owning a large percentage of the business they invest in.
What are your limits / What problems do you foresee?
A new business cannot expect an investor to know every detail about its product or service. Most investors will ask what problems a business may have in the future. Problems usually include if there will be competition and if that competition has the potential to take that business out of the picture. Knowing the market will give any businessman the edge over competition. An investor will only provide funding if a business shows that it has the ability to recreate itself when the market demands it.
A way out
Venture capitalists will only fund a certain business for a short time. They will usually come back and take their share of the profits after 5 years. Here’s where it gets tricky. Any business that has taken in an investor must know how to cash out on the collection period. The business must be able to provide for the investors demanded return. Usually, one good way out of this is to be bought out but this is only one option. Other strategies include going public or liquidating a business. However, the reasons for doing so must be justifiable.
Do you have a business that is working but need funding to make operations smoother and bring production to a larger scale? Then you might be a likely candidate for a venture capitalist. If you do plan on taking in an investor, consider the pointers above and your business should go smoothly.