How Venture Capitalists Evaluate Potential Venture Opportunities

2377 WordsAug 12, 201510 Pages
How Venture Capitalists Evaluate Potential Venture Opportunities Problem definition The case is about four interviews to capitalists from leading Silicon Valley firms to learn about the frameworks they use to evaluate potential venture opportunities. Following there’s a comparative summary of such interviews: Questions How Do You Evaluate Potential Venture Opportunities? How Do You Evaluate the Venture’s Prospective Business Model? Russell Siegelman: Partner, Kleiner Perkins Caufield & Byers (KPCB) The most important requirement is a large market opportunity in a fast-growing sector. The second factor involves a competitive edge that is long lasting. The third thing is team. We look for a strong technical founder and a…show more content…
Customers are the most important reference. We do the due diligence in-house, but we also use our entrepreneurs from previous investments. What Is the Process through Which Funding Decisions Are Made? We have particular investment hypotheses we lay out in the investment proposal. We typically list three or four key risks we want to mitigate with the money going in. Sometimes, we stage the investment. A deal takes anywhere from a month to many months to get done. Usually from start to finish is a two- to three-month period. What Financial Analyses Do You Perform? The margin analysis. If the price is lower, then the issue is around channel strategy. Usually we won’t invest in an opportunity with a lower-price point product unless there’s already some proven low-price channel that can efficiently distribute the product. On the hardware side, we are focused on the BOM and the selling price. If the BOM looks like we can get a 50% gross margin at reasonable volumes, then it’s a gross margin that’s reasonable. I think that a risk-to-reward ratio is a good way to think about the rationale for investing in an opportunity. I look at the financials to see if they make sense. We do some forecasts and projections for our investment summaries in a really brief way. Detailed projections are usually not accurate and not that meaningful. What Role Does Risk Play in Your Evaluation? We try to reduce our risk by investing in companies that are the market share
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