venture capital firms are investing "other people’s money"
money raised from pension funds, banks, university endowments,
insurance company investment arms, and so forth.
attractive investment vehicles in themselves, these venture
capital firms must be able to promise and deliver a rate of
return that is more attractive than those available in markets
for publicly traded stocks and other securities.
capital investment criteria are quite straightforward.
Does the company serve
a market that is large enough and fast growing enough to be interesting and
Does the company's
product or service have a clear,
distinct advantage in its marketplace?
Sustainable Competitive Advantage
Does the company,
intellectual property or other means, have sufficient barriers to the
entry of other competitors who can duplicate their advantage?
Does the company have a
skilled, honest, realistic, seasoned
venture management team with the ability to carry out the
business plan and to responsively weather unanticipated problems and
opportunities that arise along the voyage to success?
Are the company's
customers pleased with the product or service, or with its early versions,
and are they likely to become
valuation of the company and the
terms of the equity investment offered, attractive enough to warrant the
risk involved in the investment?
Of all of
the above, the need for a strong
management team is by far the most critical.
Estee Lauder: 15 Rules for
venture opportunity to be attractive there must be a positive
answer to all of these questions. But venture investors will
spend most of their time
verifying the quality of the team of managers who will be
spending their money.
venture capital investors, it is crucial to understand that
their own lifetime and risk strategy are going through their
capitalists hope to be able to sell their stock in three to
seven years, at or after an exit event (this is referred to as
“harvesting”). Venture capitalists know that not all their
investments will pay off. The failure rate of investments can
even be high; anywhere from 20% to 90% of the enterprises
funded, fail to return the invested capital. If a venture fails,
the entire funding by the venture capitalist is written off.