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Accounting
and Taxes | Archive
Mergers
and acquisitions: What does a venture capitalist look
for?
ABOUT THE AUTHOR
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 Brooks
Nelson is a partner in the Richmond office of Cherry,
Bekaert & Holland LLP, he concentrates in taxation
and business consulting, primarily for closely held businesses
and related individuals.
He received a Bachelor of Science degree in Business Administration
as well as a Master of Accounting degree from the University
of North Carolina – Chapel Hill. He is a member of the
American Institute of Certified Public Accountants (AICPA) and
the Virginia Society of Certified Public Accountants (VSCPA)
He can be reached at bnelson@cbh.com.
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by
Brooks E. Nelson
for Virginia Business
July 2006
Because venture capital firms are typically swamped
with inquiries and business plans, they tend to be very
selective about which companies they decide to meet with.
Often the best way to obtain a meeting with a venture
capitalist firm is to start with your contacts, especially
professional relationships, such as your accountant,
lawyer or fellow entrepreneurs. But once your meeting
is set, what does a venture capitalist look for in their
selection process?
One of the primary factors investors will want to review
is the industry-related background and business experience
of you and your leadership team. Doing so will help them
to determine whether you have the management skills to
succeed. No matter how unique your product or service,
you must show that you understand your industry, know
your market's demographics, and will reach your target
in an ongoing, strategic manner. Make sure you have a
sound business plan, and that your pricing and sales
strategies are clearly defined and in line with industry
norms.
In order to confirm that your company will have a reasonable
chance to successfully enter the market and attain a
strong market position, you will be required to demonstrate
how your company's product is unique or significantly
better than existing products in the marketplace. You
will also have to prove that there is an expressed need
for your product or services, and a large enough market
potential to make the investment worthwhile.
In addition, you need to articulate what will give your
company the competitive edge in the marketplace. Investors
want to know that you have acknowledged and researched
your competition thoroughly, and they will want to see
how you plan to contend with your competitors. And it's
a good idea to make sure your company has a patent or
other proprietary protection for your product to forestall
possible future competitors.
Remember, investors don't want
to invest in "little" ideas
- you have to show them that you have the potential to
be a big success. Be sure to develop realistic financial
projections that illustrate how long it will take for
the business to show a profit. Venture capitalists are
concerned about how they will realize liquidity and receive
value for their investment. If your product or service
can generate significant gross profit margins (40 percent
or more), your company may have the opportunity to grow
quickly and become an attractive acquisition target or
IPO candidate since large profit margins give a company
room for error and enhance its appeal.
Finally, be sure to do your research and target those
specific firms that you believe are a good match for
your ideas. You can review where firms focus their investment
efforts, including specific industries, stages of development,
geographic locations and investment amounts. If you can
demonstrate a clear understanding of your business and
a solid strategic vision for the growth of your company,
you will be well on your way to securing venture funding.
For more information on mergers
and acquisitions, contact Brooks Nelson with Cherry,
Bekaert & Holland at bnelson@cbh.com
or 804.673.4224, or visit www.cbh.com.
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