NOTE: Free essay sample provided on this page should be used for references or sample purposes only. The sample essay is available to anyone, so any direct quoting without mentioning the source will be considered plagiarism by schools, colleges and universities that use plagiarism detection software. To get a completely brand-new, plagiarism-free essay, please use our essay writing service.
One click instant price quote
... ducts and understand that innovators and their ideas and inventions form a potential to satisfy this demand. They understand that if one can merge capital with innovative and resourceful entrepreneurs, the market will buy the better and cheaper products created. That is why, the objective of venture capital is to find innovators with unique ideas and then supply them with capital to build an organisation to develop and market their innovations. Venture capitalists are a partner in innovation and share the risks and rewards with the innovator. 2. 6 Realization of financial return When an innovation has been successfully introduced in the marketplace it generally follows the product lifecycle, from introduction into the market to maturity (Kotler, 2003). Graph 1: The product lifecycle of a successful innovation (From Kotler, 2003) At the stage of full acceptance in the marketplace the venture capitalist has reached his goals.
The reward for the successful innovation is the functioning enterprise of which the venture capitalist has a share. The firm hopefully will grow further, but will be able to finance its growth through internally generated funds and regular outside financing. At this stage the venture capitalist is no longer needed. Also it is unlikely that the company will maintain the original growth of sometimes more than 100 % per year that a successful new venture can have. As a consequence the expectation for further capital appreciation will be lower than in the beginning and that is the reason for the venture capitalist to sell his share in the company. In the sale of his share (the exit) the venture capitalist realizes his financial return. 3 Screening and evaluation process 3. 1 Strategies and objectives of venture capitalists The basic strategies and objectives of venture capital firms are comparable.
In short, their goal is to search and find able and resourceful entrepreneurs with the ideas and drives to develop and introduce innovative products and services in markets that are promising. They believe that capital, good managerial advice and encouragement are fundamental for building healthy companies. Their hope is to earn a substantial return through the appreciated value of the companies created. To locate investment possibilities (deals) venture capitalists rely on contacts with professionals, scientific organizations, trade groups, the financial community and on other venture capitalists. The professional reputation of a venture capitalist is one of the main criteria persuading entrepreneurs to come their way (Bygrave, Hay and Peeters, 1999). Venture capitalists will tell you that the best deals come from referrals of entrepreneurs who they provided with capital in the past (Silver, 1985).
Larger or well established firms can receive hundreds of proposals per year. The quality of unsolicited proposals is generally poorer than proposals through referrals because no prior quality "screen" exists. It is important for the venture capitalist to organise an efficient screening and decision making process to help him in deciding whether or not to invest in a certain deal. 3. 2 Screening and decision making process In the following steps the screening and decision making process used by venture capitalists to analyze investment possibilities is presented. The first step is to identify whether a proposal is of interest to the venture capitalist and if it is broadly within the geographical area and within the areas of experience of the venture capitalist and the investment objectives of the capital he has available. Proposals which are clearly outside these criteria are immediately rejected. Around one in three deals are rejected at this first screening. (Bygrave, Hay and Peeters, 1999) The second step involves a brief analysis of the business plan proposed by the entrepreneur (s).
The most important thing at this stage is the consistency of the business plan, an assessment whether the entrepreneur is aware of and has thought through the areas of product and production, marketing, finance, organisation and management and people. It is also important if the entrepreneur is aware of environmental changes that could be of influence. The point at this stage is whether the picture as a whole makes sense. This analysis may take a few hours to a few days.
As a rule of thumb, it appears that some 80 % of the proposals taken into consideration get rejected at this stage. (Bygrave, Hay and Peeters, 1999). A third analysis of a product (or service) proposed will deal separately and more detailed with the areas mentioned in step two. Product and production The proposed product will be evaluated. Its stage of development, patents and likelihood of copying it will be determined.
Costs and problems to be anticipated in actual production will be investigated. Marketing Here the products uniqueness and its specific competitive advantage in its market segment will be determined. The required introduction in the marketplace, advertising effort and the most likely market potential will be estimated. Finance Financially, the consistency and realism of the cash flow projections will be checked.
It will be determined for what purpose and precisely when funds are needed. And when sufficient turnover and break even level can be reached. Also it will be assessed what the financial consequences would be if the expectations and projections of the different aspects of the business plan come out differently. Organization and management The venture capitalist will be sensitive to what extent the entrepreneur is aware of and experienced enough to manage the operational problems of a small and fast growing organization. How well he has anticipated the administration and the controls to be put in place when the company grows as projected. People The background of the entrepreneur and key personnel will be investigated and their integrity tested.
Also the strengths and weaknesses of the entrepreneur or the entrepreneurial team and the fit of their style and goals with those of the venture capitalist will be evaluated, to insure that a working relationship can be maintained also if the going gets rough in the future. An important 'added value' to the screening and decision making process is to address strategic or longer-term issues through sensitivity analyses (worst and best case scenarios) and strength / weakness (SWOT) analyses (Bygrave, Hay and Peeters, 1999). A SWOT analysis explores the relationship between the main environmental influences and the strategic capability of an organisation (Johnson and Scholes, 2002). The investigation period at this third step of the screening and decision making process may take from a week to several months. As a rule of thumb again it seems that another 15 % of the proposals are rejected at this stage (Bygrave, Hay, and Peeters, 1999). 3. 3 Decision to invest The decision whether or not to invest in a proposal is based on the outcome of the above process. But in the end no objective method of analyses for new ventures exists.
That is why in the final analyses it appears that decisions are and must be based on experience, mature judgement, a keen sense for people and a good bit of intuition (Silver, 1985). 3. 4 Deal structuring The structuring of a deal with the entrepreneur is a very important phase of the venture capital process. Here the parameters and the conditions under which capital will be provided and control mechanisms are installed. From the interview with a venture capitalist it appears that there are many legal and practical methods to do this. A full description of these methods is beyond the scope of this paper. 4 The development of vent...
Free research essays on topics related to: venture, capitalist, venture capital, business plan, decision making process
Research essay sample on Decision Making Process Venture Capital
