In the article I share what I learned about Investments As Risk Capital. Risk Capital investments have grown manifold in economy today. In early 1990, they stood at USD 3 billion and had hit USD 106 Billion in 2000. Investors like you will fund more then 2500 companies in USA alone this year. If you are willing to invest risk capital in this high risk high gain game, read on.
Two things that will help you most in selecting good companies to invest are:
* Management team of the company
* Other Venture Capital sponsors associated with the company
Track record of entrepreneur is very helpful in determining the future prospects of the new company. Benefit of investing in good growing firm that returns range over 35% within short time. They more then make up for any losses that you might make on other companies. While investing Risk Capital, remember that only 1 out of 100 will harvest your investment.
That one investment will give you more then 300% thus averaging 35% on the whole kitty. If you look around, there are no other investments that will give you such high returns now. You will get many more opportunities in referrals once you have done two to three successful rounds of financing and harvesting.
If as a new comer in the risk capital, you are not sure on how to look for good ideas, try to list down,
* Past accomplishments of the entrepreneur: If the entrepreneur has taken risks in past and delivered, you can bet on him / her.
* Redefine target market: It is not wise to go by the definition told for target market. A definition like everyone drinks one cup of milk and the population is a billion so we have a market of one billion cups a day, is bad definition. It is very loose target market definition. Look for relevant market and size of the market. That will help you in understanding growth projections.
* Understanding of customers: Every business must understand number of customers, their buying behavior and why they will come to the new company. What will attract a new customer is very crucial.
* Understanding barriers to entry: A simple line, the first mover’s advantage, does not mean much now. At one time, when Internet Bubble was on there, first movers advantage caused funding to the tune of millions. Now you must see if their really is an advantage and how fast can it be copied or integrated by competition.
* Financial Projections: Realistic projections will be required. Some business owners start by estimating that they will monopolize the market immediately. This is a red flag for you. Do not invest your risk capital when you have great numbers without any logic. An entrepreneur who promises to underperform but delivers outstanding sales is your best friend. You should be conservative in your estimation of sales. While working on profit margins, considering the margins of other firms in same industry and then evaluation yours will be helpful.
These five steps will help you in choosing a good firm to put in your risk capital.