Evaluating the Risks and Rewards of Venture Capitalism

The turbulent economy has created a mass of skilled, creative, displaced workers who are looking for new financing opportunities. The highly-educated, highly-motivated individuals that compose this talent pool are full of innovative ideas and need funding to see their dreams come to fruition.

Venture Capitalists look for several factors before investing in upcoming companies. These questions will help in determining the risk involved with venture capitalism.

1. Is the idea unique? Has it been done before, and is it different within its industry? Consider the reasons why consumers would want to buy or use the end product. Does it have a clear, distinct market? The project needs to somehow make life easier, work better than similar, previous prototypes, or otherwise entice its audience. If it contributes to the community it serves, it is generally a wise investment.
2. How strong is the management team? Venture capital groups look for people with a strong business background, experience in the business they are starting and a defined business plan to steer the company. This management team needs to be proprietary with experience in the given industry. Of course, the ideas at the base of the company are what drive a venture capitalist to invest. But there is also the need to know that the money invested will be returned, with profit. Venture Capital firms are like winning horse track gamblers, they “bet on the jockey, not the horse.”
3. Can it be converted to an IPO within 3-5 years or trade sale? This is truly the only way for venture capitalist to make profit off their investments. Before venture capitalists decide to invest in a company, one of the first questions they ask themselves is “can we exit profitably with a IPO or trade sale with this company in the near future?” The ability to become a public company and attract stock holders is crucial. Within that time-frame, the company needs to prove its appeal to the public market and offer projections on company growth in following years. A company that can easily sell shares with a new concept or technology will attract more investors.

Entrepreneurs must meet these criteria to some extent in order to gather investments. These days venture capitalists typically receive about 200 business plans or requests per month, and usually fund only five to ten investments a year. So a business plan from a start up company better stand out from the rest of the crowd demanding attention.

As a comprehensive commercial loan broker training company, our graduates have an opportunity to participate. If a broker finds a lucrative deal, they can take an equity share early and increase profits beyond the commission earned from facilitating the loan.

Venture capital is a tough but highly profitable industry, both for entrepreneurs who benefit from investments and the investors themselves. Brokers who present companies that meet all the criteria to the right venture capital group may also find windfalls from the success of the loan and the fledgling company.