Venture Capital Criteria | Finance information

Most venture capital firms concentrate

Primarily on the competence and character of the proposing firm?s management. They feel that even mediocre products can be successfully manufactured, promoted, and distributed by an experienced, energetic management group. They know that even excellent products can be ruined by poor management.

Next in importance to the excellence of the proposing firm?s management group, most venture capital firms seek a distinctive element in the strategy or product / market / process combination of the firm. This element may be a distinctive feature of the new product or process or skill or technical competence A Particular of the management. But it must exist. It Must Provide a competitive advantage. After the exhaustive investigation and analysis, if the venture capital firm Decides to invest in a company, they will prepare to equity financing proposal. This details the amount of money to be provided, the percentage of common stock to be surrendered in exchange for these funds, the interim financing method to be used, and the protective covenants to be included. The final financing agreement will be negotiated and gene rally represents a compromise between the management of the company and the partners or senior executives of the venture capital firm. The important elements of this compromise are ownership and control. Ownership

Venture capital financing is not inexpensive for the owners of a small business. The venture firm Receives a portion of the business?s equity in exchange for their investment.

This percentage of equity varies, of course, depends upon and the amount of money provided, the success and worth of the business, and The anticipated investment return. It can range from perhaps 10% in the case of an established, profitable company to as much as 80% or 90% for beginning or financially troubled firms. Most venture firms, at least initially, do not want a position of more than 30% to 40% because they want the owner to have the incentive to keep building the business. Most venture firms deterministic mine the ratio of funds provided to equity requested by a comparison of the present financial worth of the contributions made by each of the parties to the agreement. The present value of the contribution by the owner of a financially troubled company or starting is obviously rated low. Often it is estimated as just the existing value of his or her idea and the competitive costs of the owner?s time. The contribution by the owners of a thriving business is valued much higher. Generally, it is capitalized at a multiple of the current earnings and / or net worth. Financial valuation is not an exact science. The compromise on owner?s contribution worth in the equity financing agreement is likely to be lower than the owner thinks it should be and higher than the partners of the capital firm think it might be. Ideally, the two parties to the agreement are able to do together what neither could do separately:

first grow the company faster with the additional funds to more than overcome the owner?s loss of equity, and

2nd grow the investment at a rate sufficient to Compensate the venture capitalists for assuming the risk.

An equity financing agreement with an outcome in five to seven years Which pleases both parties is ideal. Since the parties can not see this outcome in the present, neither wants to be perfectly satisfied with the compromise reached. The business owner should carefully consider the impact of the ratio of funds invested to the ownership given up, not only for the present, but for the years to come.

Control

The partners of a venture firm have little interest in gene rally assuming control of the business. They have neither the technical expertise nor the managerial personnel to run a number of small companies in various industries. They much prefer to leave operating control to the existing management.

The venture capital firm does, however, want to participate in any strategic decisions that might change the basic product / market character of the company and in any major investment decisions that might divert or deplete the financial resources of the company.

Venture capital firms also want to be able to assume control and attempt to rescue their investments, if severe financial, operating, or marketing problems develop. Thus, they will usually include protective covenants in their agreements to equity financing permit them to take control and appoint new officers if financial performance is very poor.

id=?article-resource?> Vinturella John B., Ph.D. . has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella what owner / president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com , and maintains business and political blogs

Source: http://www.lovefinanceinfo.com/2012/03/venture-capital-criteria/?utm_source=rss&utm_medium=rss&utm_campaign=venture-capital-criteria

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