Evaluation Criteria
There are two key criteria that differentiate venture capital from more conventional sources of capital. A venture capital investment typically...
- involves minority equity or quasi-equity participation (owning common shares outright, or having the right to convert other financial instruments into common shares) in a private company;
- is expected to be a long-term investment (generally from three to eight years); and requires active involvement by the investors in the companies which they finance until they are sufficiently developed for disposition.
It is important to recognize that venture capital represents an active rather than a passive form of financing. All venture capitalists strive to add value, beyond capital, to their investments in an effort to help them grow and to achieve a superior return. Doing this requires active involvement and almost all venture capitalists will, at a minimum, want a seat on the board of directors.
It is also important to recognize that although a venture capitalist invests for the long haul, that does not mean forever. The primary objective of venture capital investors is to achieve a superior rate of return through the eventual and timely disposition of investments. A good venture capitalist will be considering potential exit strategies from the time the investment is first considered.