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Entrepreneur Development Assignment amrishaverma What does a Venture Capitalist look for? Venture capitalists are higher risk investors and, in accepting these higher risks, all they desire is a higher return on their investment. The venture capitalist manages the risk/reward ratio by only investing in businesses that fit their investment criteria. Different Venture Capitalists have differing operating approaches. These differences may relate to the location of the business, the size of the investment, the stage of the company, industry specialization, and structure of the investment and involvement of the venture capitalists in the company's activities. The entrepreneur should not be discouraged if one venture capitalist does not wish to proceed with an investment in the company. The rejection may not be a reflection of the quality of the business, but rather a matter of the business not fitting with the venture capitalist's particular investment criteria. Venture capital is not suitable for all businesses, as a venture capitalist typically seeks: Proposal: After reading a sound business proposal, the venture capitalist usually knows if the partners at the fund will want to invest in the business you are presenting. If the venture capitalist (VC) does not wish to invest, the VC can save the entrepreneur a trip to the venture capital company. If the venture capitalist wants to invest, then the VC is prepared to discuss the company in detail when the meeting occurs. Some entrepreneurs believe that if they can only meet with the venture capitalist, they can "sell" their idea. This attitude is especially common in cases where the venture capitalist has read the business proposal and notifies the entrepreneur that the VC does not have an interest in investing. Entrepreneurs often believe they can meet the venture capitalist, present their idea orally, and receive financing. A meeting with the venture capitalist cannot substitute for a well-prepared business proposal that has a compelling story. After reading a strong business proposal, the VC knows precisely the type of investment they will want to make, as well as what questions still remain unanswered. For most venture capitalists, then, the business proposal is the turning point in the decision to go forward, to invest time and energy in trying to analyze the situation, and to work out a deal with the entrepreneur. The business proposal is similar to the business plan, except that it is shorter and contains fewer details. A full-blown business plan could be several hundred pages long. It would have sections on the financial plan, the marketing plan, the production plan, and personnel needed to carry out the plans. It would discuss the strengths and weaknesses of the company in all business segments. It would discuss strategies, long-range objectives, and short-run objectives. A business proposal is much like any other proposal in that it proposes something to someone. In the case of a venture capital proposal, it suggests how the venture capitalist and you can both make money. A business proposal is an abbreviated business plan with an emphasis on showing an outsider how the company will succeed. In many ways the business proposal is a promotional document meant to sell your company to an investor—in this case the venture capitalist. When you write your business proposal, remember that it's a promotional document. It is the sales literature for your company, and it must be compelling. Project : In the Project The venture Capitalist looks for the Project Cost, Scheme Of Finanicing and Financial Projections for next few years to find out validity of the project they are investing. The Venture Capitalist usually invest in projects where they see the new business idea and innovation coming up in their respective area of interest for eg. A silicon Venture Capitalist will only finance the projects where he finds innovative IT products and softwares coming up which will bring about revolution in the industry. Proponent : He is the person or the group of persons who bring forward business proposal. The Venture Capitalist looks for the track records of the proponents and the management team to find their credit worthiness and their character . The Venture capitalist looks for 5 C’s in a person before financing the project. Product : The product is the innovative idea which a proponent has come up with. The venture capitalist finds out how realistic is the product and is it worth investing in the product by finding out the forecast demand by doing a sample survey with the customers and finding out will the product match the required needs of the customers. Pricing : A term sheet including a proposed price per share is generally included in an offering memorandum. Venture capital funds typically invest in convertible preferred stock which has certain rights and privileges over common stock. An experienced securities attorney can assist in drafting and negotiating these terms. Price is a function of the company’s prospects, valuations of comparable public and private companies, the return objectives of the investors and the demand for the company’s stock. The pricing of the product is main criteria which venture capitalist looks into. New venture, both the value of the new venture and the value of the existing firm to be sold in the IPO drive the investor’s choice of price and fraction of shares sold in the IPO. When this is the case, the availability of attractive new ventures increases equilibrium underpricing, which is what we observe during hot issue periods. Moreover, I show that underpricing is affected by the severity of the moral hazard problem between an investor and the firm’s manager. In the presence of a moral hazard problem the degree of equilibrium underpricing is more sensitive to changes in the value of the new venture. This can explain why venture capitalists, who often finance firms with more severe moral hazard problems, underprice IPOs less in normal periods, but underprice more strongly during hot issue periods. Further empirical implications relating the fraction of shares sold and the degree of underpricing are presented. Therefore Pricing is the most crucial criteria upon which venture capitalist decides upon their investment Privileges : The privileges include the control in the management of the company, the right to make decisions or the number of shares offered in the company. Payback : The time period before the profit from an investment will equal your original investment for it. To calculate the payback, you plug the cumulative cash flow versus time. At the beginning of an investment, the cash flow gets negative until the investment starts to produce a return. Typically, after 1 to 3 years, the cumulative cash flow becomes positive because of the profits from the operations. This time period is the payback of the investment. Venture Capitalist invests in the projects which shows positive NPV and IRR. Payback attracts and is the main criteria in which venturecapitalist are interested in. Promotion Promotion are channels through which the company decides to promote the its product which is the channel used for marketing mix. It also includes the channel through which company is thinking of obtaining the finance. The venture capitalist looks into the promotional mix channels and also finds its effectiveness. Paperwork The venture capitalist needs to pen down the all the important paperwork which needs o be finished before entering into an venture. For ex. Requirements for opening or exiting from an IPO. The contracts or other important documents which need to be signed from between the proposer and the venture capitalist and all othe legal requirements.
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