How to Work with Venture Capitalists
Andrew Rogerson, an experienced business advisor in Sacramento who’s worked in many countries with numerous venture capitalists, says that the venture capital (VC) industry in the United States is standard across the globe as a vehicle for economic growth.
As a business owner, entrepreneurs, or would-be entrepreneur considering a sale or other investment, it’s crucial to understand how this important component of the U.S. economy operates.
The Next Stage of The Innovation Life Cycle
Venture money can be an important part of the growth of a business, particularly in the next stage of the innovation life cycle… when the company starts to commercialize its innovation. Experts believe that more than 80% of the money invested by venture capitalists goes into building the infrastructure required to grow the business. This includes expense investments such as manufacturing, marketing, and sales, as well as the balance sheet—providing fixed assets and working capital.
Another significant aspect of venture money is that it isn’t long-term money. Rather, the idea is to invest in a company’s balance sheet and infrastructure to the point when it attains a sufficient size and credibility to be sold to a corporation or so that the institutional public-equity markets can get involved and provide liquidity.
In effect, venture capitalists will make their investment in a stake of an entrepreneur’s idea. They’ll nurture it for a short period of time and then exit with the help of an investment banker or business advisor.
How Venture Capitalists Make Investment Decisions
Interestingly, a Harvard Business School study recently found that roughly 50% of venture capitalists use their gut instinct when making investment decisions rather than financial measurements. The study asked 885 institutional venture capitalists at almost 700 firms how they make decisions in eight areas: deal sourcing; investment decisions; valuation; deal structure; post-investment value-added; exits; internal organization of firms; and relationships with limited partners.
The survey showed that 9% of all VCs and 17% of early-stage VCs use no financial metrics whatsoever. Also, about 50% of VCs “admit to often making gut investment decisions,” and 78% don’t adjust decisions for risk factors.
The HBS study found that in selecting investments, VCs see the management team as more critical to success than business-related characteristics like product or technology and attribute more of the likelihood of ultimate investment success or failure to the team than to the business. VCs surveyed said that while deal sourcing, deal selection, and post-investment value-added each add to value creation, they rate deal selection as the most important of the three.
Some wise advice to entrepreneurs: when you realize your innovative idea and prior to approaching venture capitalists, work with an experienced business consultant to effectively sell yourself. This can be a major factor in a successful transaction or failure.
Successfully Sell Your Business – Read my Book
Andrew Rogerson in Northern California specializes in helping business owners sell their business including a Medical Practice and its many steps. This includes a practice valuation, creating a marketing strategy to find qualified buyers, and handling all phases of the transaction including third-party finance for the buyer, due diligence and escrow. He is the author of “Successfully Sell Your Business” which is available for immediate download.