Venture capital firms concentrate their investments in a handful of industries and are on the lookout for very specific characteritics. Below is an overview of the typical venture capital target:
Investment Characteristics
Venture capitalists are very selective in deciding what to invest in, and will only pick one company among several hundred or more, as companies that combine the ideal characteristics are very rare.
Young Companies with a Proven Concepts
The company has a proven concept but lacks the infrastructure and professional management to grow successfully. The company is usually only a few years old (sometimes few months old)
(Very) High Growth
Ideal targets are firms that have products or services that are just "catching up" and are at the very beginning of potential explosive growth. Venture capital money is then used to fund internal growth, and mostly intangible investments such as research and development of products as well as marketing expenses. Venture capital money is never used as "exit money" for the founders.
Big Potential
Given the high rate of failures of startups, venture capital funds generate a good portion of their returns from very few investments that have enormous returns. Big potential means not only fast growth, but substantial target market size, scalability (i.e. low cost of expanding the products, software companies for example), and specific competitive advantage. The key question is: can this company be sold in 3 to 7 years and generate 10, 20 (or more) times the initial investment?
Privately held
Targets are private companies owned by one or a handful of founders.
Industries
Approximately 70% of all venture capital money is invested in only five industries:
- Software
- Biotechnology
- Medical Devices
- Telecommunications
- Semiconductors
Other industries include energy, media and entertainment, equipment, IT services, electronics, business services, consumer products, financial services, computers, healthcare services and retailing.