The Process

The actual venture capital investment made in a company is preceded by a thorough and selective assessment of potential investment targets made by the venture capital investor. At the first stage, the assessment of the investment request is based on a business plan made by the company. This is the stage where most of the projects (about 90 %) of all proposed projects are rejected. The initial assessment is made relatively rapidly and therefore the company should pay attention to two aspects: the business plan should be carefully prepared and the contact targeted to the correct investors. A well-prepared business plan summary is the best means of attracting and convincing the investor.

The central issues considered by the venture capital investor at this stage are:

  • Is the company able to conduct profitable and growing business operations?
  • Do the company executives have the necessary qualities to manage the business in the various development stages?
  • Will the investor be able to obtain the desired return through an increase in the company's net worth?

Besides the company's business plan, the venture capital investor will assess the compatibility of the investment request against its own investment strategy. The decisive investment strategy criteria may be company size, development stage, branch or geographical location. Contacts directed to the correct investors at an early stage of the process will save time and diminish the probability of negative answers.

Should the investor decide that the investment request meets his criteria, the following step is a meeting arranged with the company management. Experience has shown that about half of the remaining companies are discarded at the negotiation stage.

The third stage, or the due diligence stage, involves a thorough study of the target company by the venture capital investor who assesses the company on the basis of his own, weighted investment criteria. The preparedness of the company management to launch and developed the business in question is generally seen as the most important criterion. Other vital issues include the size and development of the company's target market, the competitiveness of the company's product and technology as well as the capital required by the business at the actual investment stage and the eventual additional investment needs.

During the second and third stage of the assessment process, the investor determines the value of the company. Once the entrepreneur and the investor have agreed on the value, the investor's future share of the company is determined. In the end, the investment is made in about 3 to 4 % cases of all received investment requests. The parties finally make a shareholder agreement to establish practical operating rules.