| Many of today's new ventures, particularly Internet | | | | in the event of failure. |
| startups with their enormous cash requirements, high | | | | Size of the Venture Proposal |
| risk, and high potential return, require approaching the | | | | Few venture capital firms are interested in |
| venture capital marketplace. Venture capital investors | | | | investment projects of less than $1,000,000, and this |
| are difficult to characterize, but we can discuss what | | | | threshold is even higher for the major firms. Projects |
| venture capital firms generally look for when they | | | | requiring less are of limited interest because of the |
| analyze a company and its proposal for investment. | | | | high cost of investigation and administration. |
| What Venture Capital Firms Look For | | | | The typical VC firm will quickly reject on the order of |
| One way of explaining the different ways in which | | | | 90% of the proposals received, because they don't |
| banks and venture capital firms evaluate a small | | | | fit the established geographical, technical, or market |
| business seeking funds, is expressed by LaRue | | | | area policies of the firm, or because they have been |
| Hosmer as: "Banks look at its immediate future, but | | | | poorly prepared. The remaining plans are investigated |
| are most heavily influenced by its past. Venture | | | | with care. These investigations are costly, and |
| capitalists look to its longer run future." | | | | generally reduce the candidate pool even further. |
| Venture capital firms and individuals are interested in | | | | Maturity of the Firm Making the Proposal. |
| many of the same factors that influence bankers in | | | | Most venture capital firms' investment interest is |
| their analysis of loan applications from smaller | | | | limited to projects proposed by companies with |
| companies. All financial people want to know the | | | | some operating history, even though they may not |
| results and ratios of past operations, the amount and | | | | yet have shown a profit. Companies that can expand |
| intended use of the needed funds, and the earnings | | | | into a new product line or a new market with |
| and financial condition of future projections. | | | | additional funds are particularly interesting. |
| Banks are creditors. They look for assurance that the | | | | Companies that are just starting or that have serious |
| business service or product can provide steady sales | | | | financial difficulties may interest some venture |
| and generate sufficient cash flow to repay a loan. | | | | capitalists, if the potential for significant gain over the |
| Venture capital firms are owners. They hold stock in | | | | long run can be identified and assessed. If the |
| the company, investing only in firms they believe can | | | | venture firm already has a large risk concentration, |
| rapidly increase sales and generate substantial profits. | | | | they may be reluctant to invest in these areas. |
| Venture capital is a risky business, because it's | | | | A small number of venture firms specialize in |
| difficult to judge the worth of early stage companies. | | | | "start-up" financing. The small firm that has a well |
| So most venture capital firms set rigorous policies for | | | | thought-out plan and can demonstrate that its |
| venture proposal size, maturity of the seeking | | | | management group has an outstanding record (even |
| company, requirements and evaluation procedures to | | | | if it is with other companies) has a decided edge in |
| reduce risks, since their investments are unprotected | | | | acquiring this kind of seed capital. |