Should You Consider Venture Capital For Your Small Business? (Part 2)

Given that venture capitalists invest billions of dollars in worthy U.S. companies each year, should you consider venture capital as a viable choice for your company?   Before you spend countless hours researching answers to that question, read “Should You Consider Venture Capital for Your Small Business? (Part 1)”.  Then consider the seven characteristics below that most venture capital investors look for before investing.

Does your company have the following:

The Prospect of Excellent Returns

Venture investors are motivated by high returns. They look for companies capable of generating the kinds of profits that create significant company value.  Upon exiting an investment via a sale of company stock received, most venture capitalists look for returns well above 20% to compensate for what they believe are the high risks they assume.

A Proprietary Product, System, Method or Approach

Investors look for surefire signs that the firms they are investing in have a competitive advantage. While patents, trademarks, copyrights and other trade secrets do not guarantee success, many successful ventures enjoy one or more of these advantages.  In addition, most venture capitalists look for companies with a superior value proposition — superior advantages or solutions to problems that will lead customer to buy.

A Large Potential Market

What good is a great product or service if the potential market is too limited? In a relatively small market, a venture might have to capture the entire market to be successful. Most venture investors look for companies that operate in markets large enough to result in significant revenues and profits. Large sustainable profits invariably lead to greater enterprise value.

Customer Acceptance

Nothing is more convincing than rapidly building sales from satisfied customers. Well-written business plans, multiple patents and spectacular Power Point presentations are great, but early rapid product acceptance is where the rubber meets the road.

A Highly Talented and Experienced Management Team

Investors look for management teams that are talented and that can execute their plans. Many companies fail, not because the business plan is not compelling or well designed. They fail because the management team is unable to execute. Investors seek management teams that have executed successfully in the past and that are working on big plans with big potential returns.

A Well Thought Out Plan

Speaking of business plans, a highly focused plan usually results in a smashing success. Since most investors have limited time to meet with entrepreneurs and small business owners seeking financing, it is imperative that savvy owners put together compelling business plans. In a short well-written plan, they must communicate their vision and business concept in a convincing manner, anticipating and answering the most critical investor questions.

A Viable Exit Strategy

Venture investors usually have limited investment horizons. In many cases, they have raised their money in investment partnerships requiring a return of investors’ capital within a timeframe certain. Most have a three to seven year investment horizon. High net worth ‘angel investors’ may have more flexibility if they are convinced that greater rewards await them later. Target returns are typically achieved by requiring a sale of the company to an interested purchaser or, in a minority of cases, an initial offering of the company’s stock to the public.

If you are looking at venture capital as an option for your small business, keep these points in mind.  Venture capital is not for every business. In fact, it is a form of financing that fits only a fraction of the small businesses that launch or seek growth capital each year.  The returns required by venture investors are high, most investors look for a significant ownership position and business control, and most returns are achieved via a sale of the investors’ stock, a sale of the business or a repurchase of the investors’ investment. Find out more about partnering with venture investors by reading “Should You Consider Venture Capital for Your Small Business? (Part 3)”.

George Parker is a twenty-five year industry leader, co-founder and Executive Vice President of Leasing Technologies International, Inc. LTI provides superior financing solutions to venture capital-backed start-ups and emerging growth companies. Visit http://www.ltileasing.com/ to learn how LTI’s innovative equipment financing can help your startup move ahead.

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