What Kind of Businesses do Venture Capitalists Look for?

Whether or not you are in business, or are just an interested observer of the economic scene on a national or international scale, you will have noticed how important venture capitalism has become in the 20th century in general and in the last few decades in particular. After all, the development of the airline industry, the computer industry, Hollywood, and the Internet, all major 20th century creations, have been fuelled by venture capitalists from Howard Hughes onwards. Any observer of the present-day economic scene might well wonder what kind of businesses venture capitalists look for when they want to make an investment.

Evidently, venture capitalists take a bird’s eye view of the economy in general. They follow the laws of supply and demand to observe how each economic sector fulfils the present-day needs of the market. They take note of the advances made in science, medicine, and technology, and analyze whether or not these advances could lead to the development of new markets, the creation of new demands, the rise of new businesses, or the betterment of life in general. They look for well-managed businesses in these new sectors of the economy that only need a large infusion of capital over a few years to reach their full potential. When they make an investment, they know that it may not pay immediate dividends, but it may mature within 10 or 20 years.

Sometimes, the growth of new markets or demands can exceed investor expectations. For instance, one of the founders of IBM noted in the early 1950’s that there might only be a demand for five computers worldwide! At other times, excessive venture capital investment in a certain sector of the economy can lead to the creation of an economic bubble, which could burst at any time, leading to large-scale economic disaster. Remember the Internet boom and bust of the late 90s that was fueled by huge venture capital investments? It’s taken the Web development industry at least three or four years to bounce back from the disaster and develop a more realistic money-making model.

However, as a businessperson, your interest in the kind of businesses venture capitalists choose for investment is not theoretical but practical—you need to know how investment-worthy your business is from a venture capital point of view. Take a long hard look at what your business does and try to determine if it:

• is based on recent scientific, technical, or medical advances
• can lead to the development of new markets or the creation of new demands
• is very well-managed and only needs a few hundred million dollars to reach its full potential within the next few years.

If your answers to all three questions are “yes,” then you should definitely get in touch with a venture capitalist!