Venture Capital Criteria

Most venture capital firms concentrate primarily on the competence and character of the management of the participating company. They feel that even mediocre products will be successfully manufactured, promoted, and distributed by an experienced, energetic management group. They know that even excellent products can be ruined by bad management.

Next in importance to the excellence of the management group of the participating companies to seek the most venture capital firm a distinctive element in the strategy orProduct / market / process combination of the company. This distinctive element is a new feature of the product or process or a particular skill or technical competence of management. But it must exist. There must be a competitive advantage.

After thorough investigation and analysis, when the venture capital firm decides to invest in a company, they make a capital financing proposal. This information, how much money will be made available to be the proportion of ordinary sharestransferred in exchange for these funds to be used in the interim financing method, and the protective covenants to be included.

The final funding agreement negotiated and generally represents a compromise between the management of the company and the partners and executives of venture-capital firm. The main elements of the compromise are the property and control.

Owner

Venture capital financing is not cheap for a small business owner.The venture capital firm receives a share of the equity of the company in exchange for their investments.

This percentage of equity, of course, varies, and depends on the amount of money provided, the success and value of the company, and the expected return. It can range from about 10% in case of an established and profitable company that as much as 80% and 90% for beginners or businesses in financial difficulty. Most venture firms, at least initially, I'm not in a position of more than 30%to 40% because they want the owners an incentive to keep building the business.

Most venture firms determine the ratio of funds to equity by comparing the current financial value of the contributions of the various parties to the agreement requested charge. The present value of the participation of the owners of a starting or financially troubled company is valued appears to be small. Often, it is estimated only as the present value of his idea and the competitive coststhe time of the owner. The contribution by the owners of a thriving business is valued much higher. In general, it is enabled on a multiple of current earnings and / or net worth.

Financial evaluation is not an exact science. The compromise value of owner equity contribution in the financing agreement is expected to be lower than the owner thinks it should be and about the partners of the capital firm think it might. Ideally, the two parties to the agreement are to do in the situation,together what could not do, including:

1. The company grew rapidly with the additional funds for more than overcome the owner for the loss of equity and

2. Investment growth in a quantity that venture capital compensation for the transfer of risk.

An equity financing agreement with a result in five to seven years, which pleases both parties, is ideal. Since the parties do not see this outcome in the present, not perfectly satisfied with the compromise to beachieved. Entrepreneurs should consider carefully, given the impact of the ratio of funds to the property, investing not only for the present but for years to come.

Control

The partner of a venture capital firm typically have little interest in assuming control of the company. They have neither the expertise nor the lead managers on a number of small businesses in different industries. They much prefer to leave operating control to the existingManagement.

The venture capital firm has, however, want a strategic decision that could change the basic product / market character of the company and distracting in all the major investment decisions, or that might contribute to reducing the financial resources of the company.

Venture capital firms also want to control the situation and try to play to save their investments, if severe financial, operating, developing, marketing or problems. It is generally protectiveAgreements in their equity financing agreements to allow them to take control and appoint new officers if financial performance is very poor.

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