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Oscar Dementiev
Oscar Dementiev

6 Important Factors Venture Capitalists Consider Before Investing EXCLUSIVE



Politics plays an important role in business. This is because there is a balance between systems of control and free markets. As global economics supersedes domestic economies, companies must consider numerous opportunities and threats before expanding into new regions. It also applies to firms identifying optimal areas for production or sales. Political factors may even help determine the location of corporate headquarters.




6 Important Factors Venture Capitalists Consider Before Investing


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In addition to angel investing, equity crowdfunding and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and early-stage companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the companies' ownership (and consequently value). Companies such as Stripe, Airtable, and Brex are highly valued startups, commonly known as Unicorns where venture capitalists contribute more than financing to these early-stage firms; they also often provide strategic advice to the firm's executives on its business model and marketing strategies.


The growth of the industry was hampered by sharply declining returns, and certain venture firms began posting losses for the first time. In addition to the increased competition among firms, several other factors affected returns. The market for initial public offerings cooled in the mid-1980s before collapsing after the stock market crash in 1987, and foreign corporations, particularly from Japan and Korea, flooded early-stage companies with capital.[17]


If a company does have the qualities venture capitalists seek including a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.[citation needed]


The decision process to fund a company is elusive. One study report in the Harvard Business Review[40] states that VCs rarely use standard financial analytics.[40] First, VCs engage in a process known as "generating deal flow," where they reach out to their network to source potential investments.[40] The study also reported that few VCs use any type of financial analytics when they assess deals; VCs are primarily concerned about the cash returned from the deal as a multiple of the cash invested.[40] According to 95% of the VC firms surveyed, VCs cite the founder or founding team as the most important factor in their investment decision.[40] Other factors are also considered, including intellectual property rights and the state of the economy.[41] Some argue that the most important thing a VC looks for in a company is high-growth.[42]


Furthermore, many venture capital firms will only seriously evaluate an investment in a start-up company otherwise unknown to them if the company can prove at least some of its claims about the technology and/or market potential for its product or services. To achieve this, or even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-finance sweat equity until they reach a point where they can credibly approach outside capital providers such as venture capitalists or angel investors. This practice is called "bootstrapping".


India is catching up with the West in the field of venture capital and a number of venture capital funds have a presence in the country (IVCA). In 2006, the total amount of private equity and venture capital in India reached $7.5 billion across 299 deals.[92] In the Indian market, venture capital consists of investing in equity, quasi-equity, or conditional loans in order to promote unlisted, high-risk, or high-tech firms driven by technically or professionally qualified entrepreneurs. It is also used to refer to investors "providing seed", "start-up and first-stage financing",[93] or financing companies that have demonstrated extraordinary business potential. Venture capital refers to capital investment; equity and debt ;both of which carry indubitable risk. The anticipated risk is very high. The venture capital industry follows the concept of "high risk, high return", innovative entrepreneurship, knowledge-based ideas and human capital intensive enterprises have become common as venture capitalists invest in risky finance to encourage innovation.[94]


Yield is the last factor to consider when making your cash surplus investment decisions, but it's certainly not the least important. For most investments, the yield is determined by three other factors: risk, maturity and liquidity.


People choose investments according to their personal needs, goals and interests. There are factors which need to be considered before making investment decisions. These ensure that your money is put to its best use, and that it yields the best returns with a minimal likelihood of incurring loss.


1. Good current and projected profitability. When choosing stocks, it's important to consider a company's financial fundamentals, including earnings, operating margins and cash flow. Together, these factors can paint a reasonable picture of the company's current financial health and how profitable it's likely to be in the near and long-term.


Attracting capital into your business can be vital to ensure your startup is a viable concern, but it should also be balanced against the needs of the company. The options open to early-stage startups can be limited, with friends and family often being an important source of funds. Beyond this are venture capital investors and then financial institutions. Each of which will have its own framework for making investments and its own goals for wanting returns on any investment. Focussing on the key factors in this article can give you a good foundation for your startup and open up new sources of funding, which gives you options as your business grows.


A valuation for a startup can be difficult, unpredictable and based on professionals outside of the startup and their previous knowledge and experiences. In order to maximise value, founders can focus on key elements of their business to ensure it is best placed to build revenue, leverage opportunity and mitigate risks, inherently adding value. Valuations may be based on the team; the potential size of the opportunity; the competitive environment; and the need for further financing later on. It is important to remember that when involved in valuing a startup, no valuation is permanent and no valuation is straightforward. This report has covered 6 key factors of a tech startup valuation. By considering these factors you will discover ways of adding value to your startup. This value process will allow you to understand your market, consumers and growth strategy and in turn, prove to investors that your business is worth investing in.


Chapter 7: Market Entry Strategies Chapter Objectives Structure Of The Chapter Entry strategies Special features of commodity trade Chapter Summary Key Terms Review Questions Review Question Answers References Bibliography When an organisation has made a decision to enter an overseas market, there are a variety of options open to it. These options vary with cost, risk and the degree of control which can be exercised over them. The simplest form of entry strategy is exporting using either a direct or indirect method such as an agent, in the case of the former, or countertrade, in the case of the latter. More complex forms include truly global operations which may involve joint ventures, or export processing zones. Having decided on the form of export strategy, decisions have to be made on the specific channels. Many agricultural products of a raw or commodity nature use agents, distributors or involve Government, whereas processed materials, whilst not excluding these, rely more heavily on more sophisticated forms of access. These will be expanded on later.Chapter ObjectivesThe objectives of the chapter are:Structure Of The ChapterThe chapter begins by looking at the concept of market entry strategies within the control of a chosen marketing mix. It then goes on to describe the different forms of entry strategy, both direct and indirect exporting and foreign production, and the advantages and disadvantages connected with each method. The chapter gives specific details on "countertrade", which is very prevalent in global marketing, and then concludes by looking at the special features of commodity trading with its "close coupling" between production and marketing.Basic issuesAn organisation wishing to "go international" faces three major issues:i) Marketing - which countries, which segments, how to manage and implement marketing effort, how to enter - with intermediaries or directly, with what information?ii) Sourcing - whether to obtain products, make or buy?iii) Investment and control - joint venture, global partner, acquisition?Decisions in the marketing area focus on the value chain (see figure 7.1). The strategy or entry alternatives must ensure that the necessary value chain activities are performed and integrated.Figure 7.1 The value chain -marketing function detailIn making international marketing decisions on the marketing mix more attention to detail is required than in domestic marketing. Table 7.1 lists the detail required1.Table 7.1 Examples of elements included in the export marketing mix1. Product support- Product sourcing- Match existing products to markets - air, sea, rail, road, freight- New products- Product management- Product testing- Manufacturing specifications- Labelling- Packaging- Production control- Market information2. Price support- Establishment of prices- Discounts- Distribution and maintenance of pricelists- Competitive information- Training of agents/customers3. Promotion/selling support- Advertising- Promotion- literature- Direct mail- Exhibitions, trade shows- Printing- Selling (direct)- Sales force- Agents commissions- Sale or returns4. Inventory support- Inventory management- Warehousing- Distribution- Parts supply- Credit authorisation5. Distribution support- Funds provision- Raising of capital- Order processing- Export preparation and documentation- Freight forwarding- Insurance- Arbitration6. Service support- Market information/intelligence- Quotes processing- Technical aid assistance- After sales- Guarantees- Warranties/claims- Merchandising- Sales reports, catalogues literature- Customer care- Budgets- Data processing systems- Insurance- Tax services- Legal services- Translation7. Financial support- Billing, collecting invoices- Hire, rentals- Planning, scheduling budget data- AuditingDetails on the sourcing element have already been covered in the chapter on competitive analysis and strategy. Concerning investment and control, the question really is how far the company wishes to control its own fate. The degree of risk involved, attitudes and the ability to achieve objectives in the target markets are important facets in the decision on whether to license, joint venture or get involved in direct investment.Cunningham1 (1986) identified five strategies used by firms for entry into new foreign markets:i) Technical innovation strategy - perceived and demonstrable superior productsii) Product adaptation strategy - modifications to existing productsiii) Availability and security strategy - overcome transport risks by countering perceived risksiv) Low price strategy - penetration price and,v) Total adaptation and conformity strategy - foreign producer gives a straight copy.In marketing products from less developed countries to developed countries point iii) poses major problems. Buyers in the interested foreign country are usually very careful as they perceive transport, currency, quality and quantity problems. This is true, say, in the export of cotton and other commodities.Because, in most agricultural commodities, production and marketing are interlinked, the infrastructure, information and other resources required for building market entry can be enormous. Sometimes this is way beyond the scope of private organisations, so Government may get involved. It may get involved not just to support a specific commodity, but also to help the "public good". Whilst the building of a new road may assist the speedy and expeditious transport of vegetables, for example, and thus aid in their marketing, the road can be put to other uses, in the drive for public good utilities. Moreover, entry strategies are often marked by "lumpy investments". Huge investments may have to be undertaken, with the investor paying a high risk price, long before the full utilisation of the investment comes. Good examples of this include the building of port facilities or food processing or freezing facilities. Moreover, the equipment may not be able to be used for other processes, so the asset specific equipment, locked into a specific use, may make the owner very vulnerable to the bargaining power of raw material suppliers and product buyers who process alternative production or trading options. Zimfreeze, Zimbabwe is experiencing such problems. It built a large freezing plant for vegetables but found itself without a contract. It has been forced, at the moment, to accept sub optional volume product materials just in order to keep the plant ticking over.In building a market entry strategy, time is a crucial factor. The building of an intelligence system and creating an image through promotion takes time, effort and money. Brand names do not appear overnight. Large investments in promotion campaigns are needed. Transaction costs also are a critical factor in building up a market entry strategy and can become a high barrier to international trade. Costs include search and bargaining costs. Physical distance, language barriers, logistics costs and risk limit the direct monitoring of trade partners. Enforcement of contracts may be costly and weak legal integration between countries makes things difficult. Also, these factors are important when considering a market entry strategy. In fact these factors may be so costly and risky that Governments, rather than private individuals, often get involved in commodity systems. This can be seen in the case of the Citrus Marketing Board of Israel. With a monopoly export marketing board, the entire system can behave like a single firm, regulating the mix and quality of products going to different markets and negotiating with transporters and buyers. Whilst these Boards can experience economies of scale and absorb many of the risks listed above, they can shield producers from information about, and from. buyers. They can also become the "fiefdoms" of vested interests and become political in nature. They then result in giving reduced production incentives and cease to be demand or market orientated, which is detrimental to producers.Normal ways of expanding the markets are by expansion of product line, geographical development or both. It is important to note that the more the product line and/or the geographic area is expanded the greater will be the managerial complexity. New market opportunities may be made available by expansion but the risks may outweigh the advantages, in fact it may be better to concentrate on a few geographic areas and do things well. This is typical of the horticultural industry of Kenya and Zimbabwe. Traditionally these have concentrated on European markets where the markets are well known. Ways to concentrate include concentrating on geographic areas, reducing operational variety (more standard products) or making the organisational form more appropriate. In the latter the attempt is made to "globalise" the offering and the organisation to match it. This is true of organisations like Coca Cola and MacDonald's. Global strategies include "country centred" strategies (highly decentralised and limited international coordination), "local market approaches" (the marketing mix developed with the specific local (foreign) market in mind) or the "lead market approach" (develop a market which will be a best predictor of other markets). Global approaches give economies of scale and the sharing of costs and risks between markets.Entry strategiesThere are a variety of ways in which organisations can enter foreign markets. The three main ways are by direct or indirect export or production in a foreign country (see figure 7.2).ExportingExporting is the most traditional and well established form of operating in foreign markets. Exporting can be defined as the marketing of goods produced in one country into another. Whilst no direct manufacturing is required in an overseas country, significant investments in marketing are required. The tendency may be not to obtain as much detailed marketing information as compared to manufacturing in marketing country; however, this does not negate the need for a detailed marketing strategy.Figure 7.2 Methods of foreign market entryThe advantages of exporting are: manufacturing is home based thus, it is less risky than overseas based gives an opportunity to "learn" overseas markets before investing in bricks and mortar reduces the potential risks of operating overseas.The disadvantage is mainly that one can be at the "mercy" of overseas agents and so the lack of control has to be weighed against the advantages. For example, in the exporting of African horticultural products, the agents and Dutch flower auctions are in a position to dictate to producers.A distinction has to be drawn between passive and aggressive exporting. A passive exporter awaits orders or comes across them by chance; an aggressive exporter develops marketing strategies which provide a broad and clear picture of what the firm intends to do in the foreign market. Pavord and Bogart2 (1975) found significant differences with regard to the severity of exporting problems in motivating pressures between seekers and non-seekers of export opportunities. They distinguished between firms whose marketing efforts were characterized by no activity, minor activity and aggressive activity.Those firms who are aggressive have clearly defined plans and strategy, including product, price, promotion, distribution and research elements. Passiveness versus aggressiveness depends on the motivation to export. In countries like Tanzania and Zambia, which have embarked on structural adjustment programmes, organisations are being encouraged to export, motivated by foreign exchange earnings potential, saturated domestic markets, growth and expansion objectives, and the need to repay debts incurred by the borrowings to finance the programmes. The type of export response is dependent on how the pressures are perceived by the decision maker. Piercy (1982)3 highlights the fact that the degree of involvement in foreign operations depends on "endogenous versus exogenous" motivating factors, that is, whether the motivations were as a result of active or aggressive behaviour based on the firm's internal situation (endogenous) or as a result of reactive environmental changes (exogenous).If the firm achieves initial success at exporting quickly all to the good, but the risks of failure in the early sta


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