VC funding criteria

VC funding criteria – Different funders, like bankers, business angels or venture capitalists, put the accent on various investment criteria while making investment decisions. Entrepreneurs need to be familiar with these criteria or different requirements of potential investors in order to adjust their business plans. Motivated by the phenomenon of venture capital, numerous researchers worldwide are trying to identify the venture capitalists investment criteria.

Despite the large number of studies, there is still no unambiguous answer to what the key venture capitalists’ investment criteria are. I have tried to provide an overview of research about investment criteria set by different suppliers of capital with a special emphasis on venture capitalists’ investment criteria. The most used VCs’ investment criteria discussed in various articles published are identified and analysed in order to provide a new set of VC investment criteria

I have referred over 7 articles to identify most important Venture capitalist’s investment criteria –

Personality of Management

• Business concept is presented in a convincing way
• A high ability to perform and persist is apparent in management
• Management detects risks, judges them correctly, and reacts accordingly
• Management determines problems, establishes goals, and assigns duties
• Management can motivate employees
• Management works conscientiously and does not neglect details
• Management strives for independence

Experience of Management

• Management is thoroughly familiar with the target market
• Management is competent and experienced in research and development
• Management is competent and experienced in production
• Management is competent and experienced in marketing
• Management is competent and experienced in the finance
• Management is competent and experienced in leadership
• Formal degree coherent with the venture

Characteristics of the product

• Customer utility of the product is apparent
• Product is a clear improvement over existing products
• Product is highly innovative and high tech
• Product or its production is proprietary (patent or license)
• Development stage of the product is completed (functioning prototype)
• Product has a proven market acceptance
• Product has the potential to create a product family

Characteristics of the relevant market

• Target market possesses a high growth rate
• Little competition in the target market during the first three years
• Existing distribution channels
• International markets can be opened with the venture
• Entirely new markets can be opened with the venture

Financial Investment Criteria

• High appreciation potential of acquired equity stake
• Ability to cash out
• Scale and chance of later funding rounds
• Dividend potential from acquired stake
• Required annual ROI (in %)
• Expected annual rate of return from the investment portfolio (in %)

There is still no unambiguous answer what the key venture capitalists investment criteria are. Most research has shown that each proposal goes through multi-phase estimation, considering five basic categories:

1. The entrepreneur / team characteristics
2. The team experience
3. Characteristics of the products/services
4. Market characteristics
5. Financial and other characteristics

Venture Capital Investment Stages

 

VC funding criteria

 

Important investment criteria in individual financing stages in every stage of funding

To conclude my findings, I have referred various documents (available in open library) published from 2000 to 2017.