• Are you or do you wish to become an entrepreneur?
• Are you willing to pass on minority or majority steak of your company to a venture capital firm?
• Do you believe that this venture capital will help your company develop fast?
• Do you have a good business plan?
• Do you know how much capital you will need and how to use it?
• Are you willing to cooperate with a venture capital firm for the development of your firm?
If the answers to the above questions are “yes” then indeed venture capital financing is appropriate for you.
Venture capital firms usually have a specific investment strategy and can invest:
• In different stages of the development of a firm e.g. startup, development, expansion etc.
• In specific sectors (e.g. biomedicine, IT etc)
• With specific investment capital (e.g. <EUR 1mln, EUR 1.5mln, >EUR 5mln)
• In a specific geographical location
• With a specific type of investment (e.g.: equity, bonds, mezzanine etc)
• With different liquidity and performance expectations
• With active or passive support in management
The best choice that leads to the best possible value for all interested parties occurs when the venture capital firm’s investment criteria match the manager’s or the company’s special needs.
Venture capital firms are investors who take on important risks aiming at high returns for their investment. The risk/return relationship is being managed by investing in companies that cover their investment criteria and as long as a thorough audit has been performed.
Venture capital firms set a number of criteria when it comes to choosing their investments. These criteria can be related to the position of a firm, its size, its stage, its structure and the involvement of the venture capital firm in the management of the firm. An entrepreneur should not be disheartened when a venture capital firm refuses to invest in his company. This rejection might not be related to the quality of the company but to the fact that the company might not suit specific investment criteria that the investor requires.
Venture capital firms usually require:
- Innovative, dynamic companies: Venture capital firms seek innovative companies, a powerful strategic position and advanced goods or services that aim at fast developing and non satiated markets. Alternatively, in MBO cases, they seek companies with high credit ability, with stable revenues and with high debt quittance.
- Competent management: Venture capital firms must make sure that the company’s management is capable in reaching the goals that have been set. They seldom seek management control. They prefer to add value to their investments through their expertise in raising capital, in mergers and acquisitions, international marketing and global networks.
- Corporate Governance and structure: Venture capital firms want to make sure that the invested companies have the will to adopt to updated corporate governance standards. They normally require the presence of non-executive members in the board of directors as well as a representative of the venture capital firm. Venture capital firms avoid complicated and opaque corporate structures.
- Ideal investment structure: The contract that will be signed between the venture capital firm and the invested company, should include terms for the protection of the minority capital
- Liquidation prospects: Venture capital firms investigate liquidity potential from their investments such as an IPO a buyout form the entrepreneur or a third party.
The investment process differs from every venture capital company, in general however the pattern is as follows:
• Initial approach from the entrepreneur or his advisor
• Provision of a business plan
• Meetings regarding the plan including several management members, as well as on-site visit(s)
• Negotiations and initial contract signings (letter of intent, confidentiality agreement)
• Procedure of thorough auditing, which usually includes financial and legal due diligence, as well as operational and structural audit of the business. The investigations are being performed by the venture capital firm itself, as well as from other sworn auditors, law firms etc.
• Final Shareholders agreement. The final agreement is usually taken during a shareholder meeting, while there are often the cases when changes in the articles of association are required.
The time period from the initial contact to the agreement last usually two to three months, depending on the level of preparation.