Venture Capital Investment Criteria

Venture capital investment refers to the capital invested into “risky” ventures to obtain a very high rate of returns. Venture capital is invested into equities rather than loans to get a good rate of return. The venture capital is provided to companies in the various stages of development and venture capital investment criteria are the methodologies followed by venture capitalists to select appropriate ventures for investment.

Venture capital investment criteria is not just meant for small and midsized businesses but it can be an investment into a project of a large business, or into a startup company aiming to grow significantly. The venture capital investment criteria are based on the potential of the company to grow fast within a limited time period and resources. The venture capital investment criteria define the set of rules for investment in ventures to get a high growth potential. The ventures which can provide great returns and the ventures where the investor can have a successful “exit “ within the desired time period of investment varying from three to seven years is considered to be an ideal venture capital investment option. The startup company which is based on innovative structure and a well designed business model supported by a strong management team attracts venture capitalists. The venture capitalists ensure stocks follow the desiredventure capital investment criteria to make mature investment in stocks to get high returns.

Venture capitalists should follow the some of the basic venture capital investment criteria before making any investment. The basic venture capital investment criteria are “never pay with pay off” and “keep an exit plan.” The venture capitalists should never pay with pay off and always keep money for personal needs before spending on venture capital because the failure rate in venture investment can be more than 50%. In some stocks it can more than 90% and if the venture fails, the entire funding is written off.

The venture capitalists spend money to raise more money and the venture capital investment criteria help them to make the right options. Some significant venture capital investment criteria are as follows:

Venture Capital Investment Criteria 1 – More Risk More Returns

One of the main - venture capital investment criteria is “more risk gives more returns.” Investment in risky ventures can get higher returns if the ventures are selected carefully. The investor should know for which stage of development the investment is needed. It will provide a basic idea of the risk factor involved and time period of investment. There are different options to make venture money – IPO, and Merger and Acquisition. The initial public offering or IPO of a large company is most attractive of venture capital investments because it comes with a low risk.

Venture Capital Investment Criteria 2- Company’s Profile

The venture capital investment criteria are mostly based on the company’s profile. The company should be a fast growing company which has a huge market presence and the company should have abundant intellectual property to be able to put barrier to its competitor’s growth. The company should be large or reputed enough to be able to grow fast. The company should be into a promising business field.

Venture Capital Investment Criteria 3 – Company’s Development Stage

Venture capital investment criteria are designed to know the stage of growth of the company and the risk involved. Generally, venture capital investment is needed for four different stages of the company’s development - idea generation, start up, ramp up and exit. The venture capital can be for getting the “seed money” for introducing a new idea in the market. Since the risks involved in new venture is high, the profits are also high in new ventures. It can be for start up of a company, or the company may need funds for marketing and development. Some companies require venture capital for first round – early sales and manufacturing, and some companies may need working capital. The company may require money for expansion or for going public.

Venture capital investment criteria 4 – The business model

Venture capital investment criteria are about secure and high returns, and the business model of the company enables it to grow fast. A company fulfills the venture capital investment criteria if the products sold by the company have a high market demand. The company should be able to deliver products to make customers repeat customers. The company should be able to generate more revenues with limited resources. The business model should fulfill the venture capital investment criteria. It should have the potential to attract customers and stay ahead of competitors.

Venture capital investment criteria 5 - Management team

A strong management team is needed for a company to sustain for long. If a company is not supported by a strong management, it will not be able to deliver its plans and the company may not perform well, therefore, a good management team is one of the most important venture capital investment criteria. There are many companies which fail to deliver the expected results because there are clashes within the top management. The leading management of the company should be strong, professional and expert at its job. The management team should have skilled, realistic, honest and seasoned group of people who have the capability to turn plans into reality. The company should have people to be able to anticipate the problems and prevent the company from dangers. Both the top management and the marketing teams of a company should be strong to keep it going.

Venture Capital Investment Criteria 6 – Company’s Valuation

The market valuation of company in term of investments and equity should be attractive because a good valuation reduces the risks involved in the investment.

Venture Capital Investment Criteria 7 – The Exit Plan

Venture capitalists mostly hold the stocks for three to seven years and they should have a proper “exit plan” to opt out of investment.

If somebody is interested in investing in equities, he / she can contact the person / persons who are into venture capital investment. Venture capital firms are organizations which provide the service of venture investment to people and these firms have a set of predefined methodologies and venture capital investment criteria to enable the investors to get desired returns.