Venture Capital investors are not interested in dividend income, but are aiming to grow the value of their investment in a company. In order to judge this, they will use (among others) the following elements:
- The Internal Rate of Return (IRR) is an important measure of the growth potential of an investment. The hurdle rate does vary from fund to fund, but is usually set between 40% and 60% per annum. Another reason for using the IRR as an indicator of the worth of an investment is that it permits the investor to prioritise the opportunities on his desk in order of potential return. Thus, even a good project will not necessarily be funded if it happens that strong competitive opportunities are around.
- The Market Potential of the project influences greatly the potential returns of an investment. Innovative projects which create an entirely new market obviously have more chance of achieving a high growth rate than projects that aim at established markets where there are already a large number of competitors.
- The Management Team proposed will be looked at closely by Venture Capital investors, and it will be thoroughly assessed whether the team presented has the skills and capability to create a profitable business around the technological breakthrough on which the project is based.
- Intellectual Property Rights on this technological breakthrough and the undisputed ownership of these, are also indispensable if the company is to take full advantage of market opportunities. The INNOVATION/SMEs Programme is creating an IPR Help Desk in order to assist innovative companies with the protection of their inventions.
- The Size of the Investment is a major factor. Even a very high rate of return will not produce significant amounts of cash if the capital invested is very small. More importantly, however, the cost of a small investment is as great, or proportionately greater than, that of a large investment. For this reason, some Venture Capital funds will not consider investing less than e.g. 500.000 Euro - sometimes a great deal more.
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