Are there some sectors that are alltime favorites for a VC? Sectors of investing interest vary from fund to fund based on the fund size/stage of the fund, etc. In general, sectors which have a large established market (or are expected to see emergence of a large market), sectors which are insulated from adverse economic cycles and sectors which focus on solving a well-defined problem become interesting for investors. Examples of such sectors include healthcare, energy, education and the Web. What is the role of intermediaries in connecting entrepreneurs to investors? A good intermediary is expected to map the needs of the entrepreneurs with the right type of investors. In addition, it is important for the intermediary to understand the business which he is representing as well as the drivers behind business. It is also important for the intermediary to understand the dynamics/return expectations of the investors and help the entrepreneurs to get a fair deal. How does a VC value a business? Early stage VC valuation is more an
Early stage VC valuation is more an art than a science. It is important to realize that investor valuation is not based on a control perspective but is more based on returns perspective.
art than a science. It is important to realize that investor valuation is not based on a “control” perspective but is based more on the “returns" perspective. For an investor, valuation on its own is a not a significant factor and what is important is to understand the return on investment to him at that valuation. Early stage valuation depends on the characteristics of the specific deal such as team, stage, traction, risk profile as perceived by the investors, etc. However, in general, valuation more often than not is a negotiated value and is generally based on factors such as: • Minimal required shareholding for the investor in terms of his funds mandate • Expected target return from the investment at the time of exit/ probability of exit • Expected dilution from follow-on financing rounds • Stake needed/expected for the founders / management team to align the interests of all shareholders.
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