Page 218 - Finance for Non-Financial Managers

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Attracting Outside Investors
What Venture Capitalists Want to See
Venture capitalists are attracted by the following:
• All the things on the angels’ list (above) 199
• A polished business plan with solid thinking in regard to
all the key success factors, the inhibitors to success, and
the advantages of the proposed product or service
• A potential market that is very large, so that even a small
market share will produce a big sales volume
• The ability of the new company to gain a foothold in the
market that will inhibit competitors
• A distinct competitive advantage over all the alternatives
that customers have or might have in the future
• For a technology company, a compelling new technology
that is difficult for potential competitors to copy, circum-
vent, or make obsolete
• The potential to grow to a valuation at least 10 times
beyond the valuation at which the investors purchased
their shares within a reasonable timeframe, typically three
to seven years
Valuation is the term used to define the proposed total mar-
ket value of the venture, which will in turn define the amount of
ownership interest the investors will receive for a given dollar
investment. This valuation is an estimate of a company that
typically has no value in traditional terms—sales and
earnings. Therefore, it’s as
much a negotiation as a Valuation The proposed
total market value of a ven-
calculation.
ture, which defines the
For example, a venture
amount of ownership interest any
may be valued at $5 mil-
investor will receive for investing.
lion by the founder, who Since this valuation is an estimate of a
might want to raise $2.5 company that typically has no value in
million. The founder’s cal- traditional terms (sales and earnings),
culation might go as it’s as much a negotiation between
shown in Figure 12-1. the company and venture capitalists
as a calculation.
The venture capitalist,