Venture Capital firms are out to make money—lots of money, if possible.
The first thing to know about VC firms is that they are investing other peoples’ money, rather than their own. The money comes from a variety of sources including insurance companies, banks, pension funds, university endowments, and corporate investment entities. The game is to out perform the stock market; risk comes with the investment but the goal is to not to lose the farm.
Thus, venture capital investments must meet these general criteria:
• The investment must serve a large, fast growing market. Niche markets are seldom big enough for a VC investment.
• VCs want to invest in companies in emerging markets rather than in mature markets. This is the domain of value added pricing and high profit margins.
• The company offering must have a clear competitive advantage. The offering must be truly unique and valued by the target customer.
• The competitive advantage must be sustainable. If the offering is easily copied or duplicated, it is not a fit for venture money.
• The management team must be top notch if not over qualified. Pedigrees count and only winners are hired. No second chances here.
• The offering must be scalable and repeatable. This favors products which can be built rather than labor intensive service businesses.
• The return on investment opportunity must be extraordinary—a 25-100 times return in 5-7 years is not an uncommon goal.
John Bradley Jackson
© Copyright 2009 All rights reserved.
You have captured the essence of VCs. Many entrepreneurs come up with truly great ideas for products, but do not fit the requirements you enumerated, most importantly the VCs’ need for extraordinary ROI. The San Jose Mercury News runs a series where a guest VC appraises ideas submitted by readers. Most are shot down for not fulfilling the requirements you cite. The expectations are sky-high, and even those who are successful in gaining venture backing are not guaranteed slam-dunk success (e.g, Yahoo, TiVo, etc.) However, that is not a reason to give up. If a person doesn’t qualify for Harvard or Julliard, it doesn’t mean they can’t get a great college education somewhere else. Small businesses (defined as less than $100 Million!) can grow and thrive without ever needing venture funding.
Liz,
I agree.
The bar for VC financing is higher than most realize. It is no wonder that the deals financed by the VC community are seldom the business concepts of typical entrepreneurs. My experience is that the plans that get financed are most often built by venture community insiders—which is a small closed society.
JJ