You have a great idea and no capital but no one is willing to pump money into the idea. Why are venture capitalists not buying into the idea?
Your idea has no value
Your idea is too costly
Many people would like to eat chicken fed exclusively on shrimps from the Mariana trench. It sounds good but what is the cost? A good idea could be too costly to implement such that it is not financially viable. When it gets to the market it could be too expensive to attract a market, or be too noncompetitive to survive in the market.
Always look at similar or almost similar products in the market when designing it. Assess the competition and try looking at what value your idea could add on top of what is on offer. If you have a new product, look for ways to cut down on costs such that the final price is not too high as to be nonviable.
You have a bad team
Your idea is only viable only if your team is competent. Developing an idea into a great product requires a good team, knowledgeable on the market trends, and industry dynamics. Venture capitalists could be shying away from your idea because they don’t have faith in your team to deliver a great product. Your team could be lacking in skills to make the product viable on the market.
Picking the right team to develop your idea involves looking at their technical skills and their understanding of the market the product is meant for. The team must also buy completely into your idea. Potential investors can read the team’s confidence in your product by how well they can explain the concept. Ensure every team member gets the concept and can convincingly explain it. Always engage professionals in areas that you are not competent.
The Leverage ratio is the way to indicate the risk factor of banks, if the leverage ratio is too high then the risk of the bank is high. There are certain percentage of the fall in earnings the banks can handle without distressing the health of the bank. The leverage ratio is asset to equity. After obtaining the leverage ratio then we can find by how much the fall in the earning banks can handle.
Leverage = Asset / Equity
Risk = 1 / Leverage Ratio
Comparing the leverage ratio of 3 Banks
BANK A 2015
Total Asset: 500,000
Total Liabilities: 350,000
Total Equity: 55,000
The Leverage Ratio: 500,000/55,000=9.91
Risk factor in falling of earnings: (1/9.91)x100=11%
The Leverage ratio of Bank A is 9.91 and if Bank A has more than 11% fall in the earnings then the bank will be at risk. Bank A can bare up to 11% fall in the earnings.
BANK B 2015
Total Asset: 400,000
Total Liabilities: 300,000
Total Equity: 35,000
The Leverage Ratio: 400,000/35,000=11.43
Risk factor in falling of earnings: (1/11.43)x100=8.75%
The Leverage ratio of Bank B is 11.43 and if the earnings falls by more than 8.75% then the bank will be at risk. The high the risk factors in falling of earnings then better it is because that is the percentage in fall the banks can bare without going into financial distress.
BANK C 2015
Total Asset: 350,000
Total Liabilities: 300,500
Total Equity: 50,000
The Leverage Ratio: 350,000/50,000=7
Risk factor in falling of earnings: (1/7)x100=14.3%
The Leverage ratio of Bank C is 7 and if the earnings of Bank C falls by more than 14.3% then the bank will be at risk.
When we compare all three Banks the Bank C has the lowest leverage ratio which means the Bank C has the lowest risk of financial distress.
Percentage of ownership
Will you get the 50 percent of the money that the company was sold?
Pay attention to new contracts
Conclusion and Suggestion
Contracts between Venture Capital and Entrepreneur is among the key focus of many research academics in Finance. Most of the entrepreneurs ignore the importance of contract because they are so convinced that they will get 50 percent of the money that will be earned by the company. If you as an entrepreneur aware of exactly how much you will get when the company is sold in trade off or IPO then you will have no regrets. Venture Capital investors also tries their level best to avoid these kinds of misunderstanding because they cannot sell the company unless entrepreneur is fully agreed to sell when it is time to sell. For example if your company was sold for $30 million and you only get $2 million, you might not agree and destroy the contract. Transparency is important for Venture Capitalist and Entrepreneurs. Suggestion is to get a lawyer to have a look at it and explain the terms.
Investment partners with desire to spend on unnecessary things
Investment partners that cares only about profit
Investment partners that are not honest
Investment partners that devalues your abilities, ideas and contribution
Investment partners that has high ambition with less patience