At the development stage of every business, it is likely to require an infusion of funds to help it grow. At this point several financing options come to mind one of which is the venture capital financing. Venture capital financing is a kind of equity investment in a business by external investors who are not the owners of the company. Venture capital is a type of funding for a new or growing business. It usually comes from venture capital firms that specialize in building high risk financial portfolios.
Venture capital funds are typically obtained from institutional investors, especially pension funds, financial intermediaries and the corporate sector. Most venture capitalists (VCs) provide large sums of equity finance and also bring a wealth of expertise to a business, and it is easier to secure further funding from other sources if venture capitalist financing is successfully attracted.
Worthy of note is the fact that the investors offering venture capital funding consider a number of factors before they commit to investing in a business. It is therefore important that businesses are well positioned and structured in such a way as to attract venture capitalists. The most prominent of the parameters/criteria which are considered by VCs before they invest in any business will be discussed below.
Venture capitalist investment criteria
1. Unique business idea
In order for VCs to justify the large risk they are taking with your business, you must offer them a fresh business venture that promises to fill a void in the marketplace (Hartwig, 2013). Investors look to fund businesses that are novel, innovative, and unique, and cannot easily be replicated. Such businesses must also possess traction and market share. It is also important to present to the investors an analysis of the products and or services the business will be involved in as well as the vendors and other sources through which you will manufacture your products or offer your services to the customers, as highlighted by Venture Capital Investment, UK.
2. Solid Management Team
Investors are more inclined to fund a business with a strong management team. The management team of a company are typically saddled with the responsibility of upholding the principles of good corporate governance. Having a strong management team is Ryan Feit of SeedInvest, an equity-based crowd funding platform had this to say about the importance of a strong management team:
Given the high degree of uncertainty associated with early-stage investing, VCs bet on the jockey over the horse because they need to have a high level of conviction that the team has the necessary skills, domain expertise and diversity to evolve just as quickly as the industry does.
3. Market viability and sustainability of the business
Venture capitalists want to see the marketability of the business. In essence, one has to show how sustainable, growth–oriented, competitive the business is as well as how beneficial it will be to the investors. Also, in selling the efficacy of the business, characteristics of the business, market size, future growth prospects, demographics of the market you wish to capture, sales potential of the company and brief research about ongoing market trends will mark an impression on the investors.
A business with high prospects even in the worst economic heave is more likely to attract VCs. In a competitive economy, it is important for businesses to show cognisance and relevance in their market.
An example of an innovative business idea, which venture capitalists invested in, is ‘Paystack. You would agree with me that the idea of ‘Paystack was unique and had strong future growth prospects. With an understanding and implementation of the above criteria, your business has a solid shot at attracting venture capital investment regardless of the fact that the team is made up of young entrepreneurs.
It is also imperative for your legal advisors to conduct a legal audit on your company in order to ensure that the necessary documentation, structures and systems are in place before you approach investors for funding.
Olumide is Partner & Team Lead, Start-up Advisory at Acuity Partners. firstname.lastname@example.org