How Venture Capitalists Evaluate Potential Venture Opportunities

295A_ENTREPRENEURSHIP AND VENTURE INITIATION

Assignment 1: Case analyses -

How Venture Capitalists Evaluate Potential Venture Opportunities

By Catherine Chen

October 18, 2014

“There is a great opportunity in the market.” That is how we always describe - linking opportunity to market. It is true. To start up any business, we need to make sure that there are enough market potentials. Meanwhile, we should understand what we have and how to leverage our expertise and resources to achieve the goal in this market. This is my instinct answer towards the question discussed in this case.

However, after reading it, I found that although VCs may use similar criteria to evaluate a new opportunity, they have a totally different perspective. Essentially, venture initiation is an investment for them. They pursue large market, low costs, and high returns1. VCs will look into the detailed business models and do a lot of due diligence to evaluate the opportunity, though might in different ways or focuses.

To know VCs’ thinking changed my mindset, helping me gain more objective and comprehensive understanding on how to evaluate a new business opportunity. Above all, I think that the evaluation model should dig into three factors: market, team and product.

Market is still the most important. Whenever I saw an unfulfilled customer need, I would think that it was a business opportunity. But VCs seek for larger market. They want IPOs. Although VCs also look at the revenue, the overall value of the company at the time of exiting is more important for them2. Therefore, entrepreneurs should really dream big and dare to imagine all possibilities. Be aggressive enough and think in the long term! To project your company in 10 or 20 years - does it become an industry leader? What is your objective at that time?      

Some VCs view the team as the most important, such as Fred Wang3. Success is not guaranteed without execution, no matter how great the business idea is. Although some VC emphasize a lot on business models, I still believe people is more important than the model. I have a VC friend who is now raising fund for two entrepreneurs in Beijing. He has worked in telecommunication industry in Asia and Africa for many years and earned an MBA in Yale SOM. He said that he would exert his efforts to help them since he believed that they could eventually succeed even if their current projects fail.

Product is also very important but I rank it lower than team, since a good team will quickly adjust their product or strategy to adapt to any new market situations. But I agree that good product would set a threshold by itself even if competitors already exist in the market. The key is to find your uniqueness. FcaeQ is an avatar-making app which ranks top in iTunes in several different countries. Although there were already some avatar apps, FaceQ successfully seizes the needs of young people who like cute, new, trending and cool things by letting them design and create animation avatar by themselves.