Many ventures are faced with the challenging task
of raising venture capital. The first part of this process is finding
the right venture capital firm (VC). While this may seem simple, it
isn’t. There are thousands of venture capital firms in the United States
alone, and going after the wrong ones is one of the most common reasons
why companies fail to raise the capital they need.
When seeking a venture capital firm, there are six key variables to
consider: location, sector preference, stage preference, partners,
portfolio and assets.
Location: most venture capital firms only invest within 100 miles of
their office(s). By investing close to home, the firms are able to more
actively get involved with and add value to their portfolio companies.
Sector preference: many venture capital firms focus on specific
sectors such as healthcare, information technology (IT), wireless
technologies, etc. In most cases, even if you have a great company, if
you fall outside of the VC’s sector preference, they’ll pass on the
opportunity.
Stage preference: VCs tend to focus on different stages of ventures.
For instance, some VCs prefer early stage ventures where the risk is
great, but so are the potential returns. Conversely, some VCs focus on
providing capital to firms to bridge capital gaps before they go public.
Partners: Venture capital firms are comprised of individual
partners. These partners make investment decisions and typically take a
seat on each portfolio company’s Board. Partners tend to invest in what
they know, so finding a partner that has past work experience in your
industry is very helpful. This relevant experience allows them to more
fully understand your venture’s value proposition and gives them
confidence that they can add value, thus encouraging them to invest.
Portfolio: Just as you should seek venture capital firms whose
partners have experience in your industry, the ideal venture capital
firm has portfolio companies in your field as well. Portfolio company
management, since they are industry experts, often advises VCs as to
whether the company in question is worthwhile. In addition, if your
venture has potential synergies with a portfolio company, this
significantly enhances the VCs interest in your firm.
Assets: Most companies seeking venture capital for the first time
will require subsequent rounds of capital. As such, it is helpful if the
VC has “deep pockets,” that is, enough cash to participate in follow-on
rounds. This will save the company significant time and effort in
maintaining an adequate cash balance.
Finding the right venture capital firm is absolutely critical to
companies seeking venture capital. Success results in the capital
required and significant assistance in growing your venture. Conversely,
failing to find the right firm often results in raising no capital at
all and being unable to grow the venture.