refer to criteria venture capitalists use when evaluating a company. Knowing something about these criteria can improve an entrepreneurís odds of getting funded by helping him focus his business plan on the factors that matter most to investors.
Stanley E. Pratt, former publisher of the Venture Capital Journal and noted venture capital authority, once identified five principal factors venture capitalists look for in a company. Those factors are: management, management, management, market niche, and product or service.
The listís emphasis on management is deliberate. Many entrepreneurs over emphasize their product or service when making a presentation to an investor. They fail to realize that investors tend to be more interested in a companyís ability to build a business than they are in its particular product. Most experienced venture investors have seen plenty of good, even spectacular, product ideas fail. At the same time, most investors have seen companies succeed in ways they did not anticipate when funding was solicited. It is the management team, therefore, that many investors consider to be the single most important ingredient for a successful company.
Another prominent venture capitalist identified five different factors his company uses when investigating a company. The potential for large long-term profits is the first factor. To fulfill the requirement a company must be able to forecast significant, profitable growth over an extended period of time.
The second criterion related to whether the company has the right technology at the right time. A product that is too revolutionary or not revolutionary enough might not qualify. Technology that is easily replicated would fail too, especially if large competitors exist with superior channels of distribution.
The third criterion is potential for high profits. High profits improve cash flow and make it easier for companies to grow. Companies in markets that are intensely price-competitive might not qualify under this criterion unless their products can be produced for significantly less than their competitorsí products. This criterion can be hard to meet when a market does not already exist for the companyís product. When this is the case, investors cannot be certain of profit margins or even of the companyís ability to build a profitable market.
Management is the fourth criterion. All investors look for companies with complete and well-rounded management teams. Investors like managers who are not only competent, but who are flexible and open-minded. The characteristics this investor looks for when evaluating a manager are: judgment, aggressiveness, sincerity, experience, and charisma.
The fifth, and last, factor considered is what value added the investor can bring to the company. Money is important, but the investment potential of a company is enhanced if the investor can offer the company something more in the way of experience or contacts. See: Business Plan, Business Plan Format, Commitment, Entrepreneur, Management Team, Value Added, Windows.