As a rule, venture capitalists evaluate investment opportunities based on the scope and scale of a return on investment.
For their part, companies seeking to obtain investment capital to launch, develop and grow their business often focus their pitch to investors on the highly technical aspects of their business or product—especially in the areas of energy, advanced materials, chemical processes, manufacturing of medical devices, electronics and capacitors.
To make a deal, both the entity seeking capital and the investor must come to the same understanding: that there is value added to both parties through the agreement, and the return on investment is imminent based on the product and business model.
Business Report asked investment professionals working in various capacities in the venture capital space how they decide which projects to fund. One common theme arose: Investors invest in the people who can manage a company and follow the business plan and are often not as focused on the specifics of the technology itself.
NEIL MASON
CHIEF IDEA OFFICER, INVENTUREWORKS
Neil Mason works with a team of innovators and investment partners to commercialize products, form new businesses and expand existing ones. When it comes to making a decision about whether to move on a new concept, Mason says investors first weigh their chances of success.
“I think overall, investors are looking for projects that are a lot less risky,” he says. “Something that is going to give them a definite return on investment.”
To move forward with an idea and ensure that desired return, Mason says it is crucial to make sure “all the bases are covered,” which means evaluating the team working behind an idea, product or company.
Mason views personnel as a top priority when evaluating a deal.
“Sometimes, you can have a great product, but it fails under a marginal team,” he says. “Other times you can have a great team with a marginal product, but that team can make it succeed. So it is really the team of people that makes a good business model.”
MARK GRAFFAGNINI
FOUNDER/PRESIDENT/CEO, GRAFFAGNINI + ASSOCIATES
Mark Graffagnini is a corporate and securities lawyer representing companies, angel investors and venture capitalists in private investment deals.
His law firm is one of the most active in the state for private equity deals. In fact, Graffagnini + Associates is quickly growing and expanding its work outside of Louisiana.
Based on his experience, Graffagnini says many factors influence an investor’s interest in a project, but four are primary: the vision for a team’s service or project, the character of the team, the quality of the product or service, and the probability that a company will be able to generate revenue on its own or emerge as an acquisition target.
Graffagnini says he is opportunistic about the industry segments he follows. “I think there are exciting opportunities in gaming and entertainment, energy, business-to-business applications, educational technology, food and beverage, and health care/biotech,” he says. “These are also the segments in Louisiana that have the most active investment right now.”
JOSEPH LOVETT
MANAGING GENERAL PARTNER, LOUISIANA FUND I
At Louisiana Fund I, Joseph Lovett says his team is on the hunt for “home run” opportunities—most often at universities with cutting-edge technologies—primarily in health care sciences.
For Lovett, a home run is defined by its capacity to eventually go public or be bought by a multinational company.
“The key,” he says, “is really the technology and the management team, as well as the future potential of the technology.”
Though some investors lean toward companies that can market, brand and sell something, Lovett’s focus is evaluating whether the technology is viable and has the potential to make a significant difference in peoples’ lives.
“We weigh the technology risk versus the execution risk and whether the management team will succeed,” he says. “But the biggest risk we take is on technology.”
THOMAS ADAMEK
PRESIDENT/MANAGING DIRECTOR, STONEHENGE CAPITAL CO.
NEMESIO VISO
MANAGING DIRECTOR, STONEHENGE GROWTH CAPITAL
Thomas Adamek, who is responsible for all operational aspects of Stonehenge Capital Co. and its fund management activities, says roughly one in 100 deals receives venture capital, and those that do have characteristics in common.
Although the quality of management is hailed as the most important consideration in the venture capitalist world, Adamek insists it is not the only factor investors weigh.
“It takes a more holistic approach, recognizing each opportunity is a unique situation,” he says.
Nemesio Viso of Stonehenge Growth Capital, which manages the venture capital and other investment activities of Stonehenge Capital Co., says that along with evaluating the management team behind a prospective investment, it is critical to ensure that the personnel involved are knowledgeable about the enterprise’s service or equipment trade.
“They need to have technical expertise to provide to the market,” he says.
Value-added service must also be an aspect of any potential venture, he notes.
For example, a service company must provide superior customer service; an equipment business must offer the most advanced equipment in the industry—the kind continually in high demand by customers.
Deep and broad customer relationships as well as quality financial and accounting systems are two other major criteria Viso says impact the decision to invest in a company.
For Adamek, it is also important to ensure that the investor and the investee have compatible goals.
“I like to find those firms where I believe I can be of assistance in creating additional value for all the stakeholders in the firm,” he says.
Even so, Adamek admits there is no proven recipe for success. “Funding,” he says, “tends to be more of an art than a science.”
