The problem facing venture capitalists in assessing a prospect is defining a set of rules needed for the valuation of the business, whether it is a reasonable or substandard concept, negotiating the agreement and whether alliances from other investors should be formed. For venture capitalists finding that high growth company, investing at favorable terms, guiding and nurturing that company and realizing a solid return on the investment depends on whether a prospect is truly transformational or simply incremental. (Lavinsky, D. 2012) Understanding business models when investing in prospective companies is a starting point. The business model defines “the rationale of how an organization creates, delivers and captures value”. (Osterwalder, 2010, p. 59). The business model logically describes how a company intends to make money, describing the core functions an organization will excel in, the competencies and structure that it needs to execute how the business creates value for its clients, stakeholders and shareholders. “A successful business model also defines the competitive advantage that will set it apart from others and make it "best in class." (Lavinsky, D. 2012)Developing rules to define how the business will create a profitable niche in the marketplace becomes necessary. Research has been performed with the goal of providing you with our “grounded theory” of a set of rules for assessing a prospective business with specific evidence to support our findings.
Method of Research
In order to create a framework of how venture capitalists assess prospects, Group 5 collected data from clips of videos from episodes of ABC’s Shark Tank. Utilizing direct observation we were able to develop, identify and categorize a theory for “rules of the shark tank”. We analyzed our data looking for patterns to develop a set of rules that a venture capitalist should follow to evaluate a business idea.