Venture Capitalists – What to Look For

Venture capitalists, also referred to as VCs, are private equity capital opportunities designed for early-stage, high-potential, growth companies that want to generate a high return by using some type of realization event, perhaps a trade sale of the company or an IPO.  These investors focus on investing in startup ventures where high returns are anticipated due to high risks.  Venture capitalists typically work for firms with other VCs, dealing with clients in trying to help them achieve financial goals.

Venture capitalists, also referred to as VCs, are private equity capital opportunities designed for early-stage, high-potential, growth companies that want to generate a high return by using some type of realization event, perhaps a trade sale of the company or an IPO.  These investors focus on investing in startup ventures where high returns are anticipated due to high risks.  Venture capitalists typically work for firms with other VCs, dealing with clients in trying to help them achieve financial goals.

Because there is so much on the line, if you have a startup company and are interested in finding the best firm to help you on your journey to financial success, it is important to choose the one that employs venture capitalists with years of experience, expertise, and proper licensing and certification.  As you start looking at different firms, you would quickly realize that each specializes on something in particular.  For instance, one VC firm might focus on helping technology companies and some may work only with science-based companies, etc.

Because of the areas of specialization, it is imperative to find the one that focuses on your industry or sector.  Otherwise, any time and effort spent would be wasted.  Remember, venture capitalists are prepared to work with high risks companies so rather than feel discouraged because you were denied funding, the right firm could help.  After matching several venture capitalists that have interest in your type of business, the next step would be to start going down a list of five criteria so you could choose the firm that is going to work best for your needs.

The five criteria used to find qualified venture capitalists specific to your company include:

1.    Geographical location
2.    State of development
3.    Area of specialization
4.    Size of investment
5.    Speed at which the deal needs to close

One of the easiest methods to find the right VC firm would be to send out a single page to the venture capitalists most interested in that would describe not just your company and what it does, but also the financial needs of your business.  Within the letter, make sure all five criteria are covered while keeping the letter to a single page.  We recommend you include the following:

1.    Geographical Location – Venture capitalists prefer to work with companies that are not too far away.  The reason is that they like to see activities of the business while keeping travel to a minimal.
 
2.    Stage of Development – If you are trying to get funding to establish proof of your business concept, only a handful of large VC firms provide this type of service.  In this case, you might consider VCs located in Canada versus the US.  In some cases, proving a concept would be relatively easy but in situations where testing with a beta site would be required to prove the concept, venture capitalists become scarce.

3.    Area of Specialization – As mentioned earlier, most venture capitalists have an area of specialization, which coordinate with their capacity to carry out due diligence.  Along with this, venture capitalists manage their own financial portfolios so if a firm has already invested heavily in a business like or similar to yours, they may not be interested, preferring to move into a different direction.  Even if what you have to offer is an outstanding investment, rather than saturate their portfolio with more of the same stuff, they would likely bypass the opportunity.

4.    Size of Investment – The amount of capital needed would be another criterion when looking for the right VC firm.  Interestingly, of the five criteria, the amount of funds needed is actually not a priority.  A good rule to follow is for $1 million and more, venture capitalists are probably the right investors but for anything less than $1, an angel investor, which would be private investors or individuals would be better

5.    Speed in Closing the Deal – The last criterion that you would need to consider in hiring a VC firm is the speed in which you need the deal to close.  Even if you were eager to close immediately, you need to plan on capital not coming through for as long as three months.  Anywhere from one to three months is considered standard so you would need to plan accordingly but make sure you know exactly how long it would take to close the deal from each of the venture capitalists being considered.