Which industries attract venture capital?
Above all, venture capitalists seek industry segments poised for rapid growth and
exceptional profits. Sustained growth and profitability beyond a five year
horizon is essential to create a premium exit value in a public offering or sale.
Ordinarily, emerging markets and industry segments offer these characteristics.
Occasionally, a new segment within a mature market, or a new method of solving an
existing problem, creates a sustained, rapid growth opportunity. For instance,
a new distribution model developed by Staples Office Supply created buying efficiencies
which enabled Staples to capture market share from then existing "mom & pop" operations.
Venture capitalists seek markets sufficiently large to achieve $100 million or greater
in value. Market critical mass is necessary to produce liquidity in a public
offering or sale. Small markets may not attract attention from stock analysts
or strategic buyers sufficient to generate premium values.
Occasionally, niche markets with unusually high barriers to entry will drive profitability
sufficient to build substantial value and liquidity.
Not surprisingly, the information technology and health care industries attracted
over two thirds of venture capital dollars disbursed in 1993. Most segments
within these two industry categories are large and growing rapidly. They have
high barriers to entry and attract premier management talent from around the world.
Consumer and retail attracted another 10% of venture dollars disbursed in 1993.
Does my company qualify for venture capital?
Provided your company is in one of the industry segments attractive to venture capitalists,
most evaluation criteria deployed are under management's control. Consequently,
the due diligence process will focus on assessing management's strengths and weaknesses.
A demonstrable track record of success by the existing managers, preferably as a
team, is essential. Experience in the same or a related industry is an advantage.
Management will be graded on their maturity, creativity, commitment, leadership
skills and communication skills. The ability of top management to attract,
develop and retain new talent is imperative. Senior management should have
an objective view of their own weaknesses.
Finally, management's goals and objectives must be consistent with the investor's.
Chemistry between the venture capitalist and management should not be underrated,
as both parties will be entering into a long term and professionally intimate relationship.
Other factors which will be evaluated by prospective investors include the following:
* How compelling is the competitive advantage of the company's product or service?
* What investment level is required to sustain this advantage?
* How is the company's market positioning unique and differentiated?
* Is competition well established or entrenched and what is their philosophy.?
* Does your company have adequate access to existing distribution channels?
* Does the economic model generate sufficient operating leverage?
* How does employee productivity, re-investment rate and capital intensity compare
to similar companies?
* What is price and valuation relative to comparable private companies?
* Are existing customers satisfied and committed to your product or service?
* Is sales momentum building?