Strong Management Team. Venture capital firms ascertain the strength of the management team in terms of adequacy of level of skills,., commitment and motivation that creates a balance between members in area such as marketing, finance and operations, research and development, general management, personal management and legal and tax issues. Track record of promoters is also taken into account.
A Viable Idea. Before taking investment decision, venture capital firms consider the viability of project or the idea. Because a viable idea establishes the market for the product or service. Why the customers will purchase the product, who the ultimate users are, who the competition is with and the projected growth of the industry?
Business Plan. The business plan should concisely describe the nature of the business, the qualifications of the members of the management team, how well; the business has performed, and business projections and forecasts. The promoters experience in the proposed or related businesses is an important consideration. The business plan should also meet the investment objective of the venture capitalist.
Project Cost and Returns A. VCI would like to undertake investment in a venture only if future cash inflows are likely to be more than the present cash outflows. While calculating the Internal Rate of Return (IRR) the risk associated with the business proposal, the length of time his money will be tied up are taken into consideration. Project cost, scheme of financing, sources of finance, cash inflows for next five years are closely studied.
Future Market Prospects. The marketing policies adopted, marketing strategies in relation to the competitors, market research undertaken, market size, share and future market prospects are some of the considerations that affect the decision.
Existing Technology. Existing technology used and any technical collaboration agreements entered into by the promoters also to a large extent affect the investment decision.
Miscellaneous Factors. Others factors which indirectly affect the investment decisions include availability of raw material and labor, pollution control measures undertaken, government policies, rules and regulations applicable to the business/industry, location of the industry etc.
SELECTION OF VENTURE CAPITALISTS
Hands on approach of VCs aims at providing value added services in an advisory role or active involvement in marketing, recruitment and funding technical collaborators. VCs show keen interest in the management affairs and actively interact with the entrepreneurs on various issues.
Hands off approach refers to passive participation by the venture capitalists in management affairs. VCs just receive. periodic financial statements. VCs enjoy the right to appoint a director but this right is seldom exercised by them.
In between the above two approaches lies an approach where V C’ s approach is passive except in major decisions like change in top management, large expansion or major acquisition.
Flexibility in deals – The entrepreneurs would like to strike a deal with such venture capitalists who are flexible and generous in their approach. They provide them a package which best meet the needs of the entrepreneurs. VC’s having rigid attitude may not be preferred.
Exit policy – The entrepreneurs should ask clearly the venture capitalists as to their exit policies whether it is buy back or quotation or trade sale. To avoid conflicts, clarifications should be sought in the beginning; the policy should not be against the interests of the business. Depending upon the exit policy of the VCs, selection would be made by the entrepreneurs.
Fund viability and liquidity – The entrepreneurs must make sure that the VCs has adequate liquid resources and can provide later stage financing if the need arises, also, the VC has committed backers and is not just interested in making quick financial gains.
Track record of the VC & its team – The scrutiny of the past performance, time since operational, list of successful projects financed earlier etc. should be made by the entrepreneur. The team of VCs, their experience, commitment, guidance during bad times are the .other consideration affecting the selection of VCs.