How should our company select a venture capital partner?
Venture capital is an expensive source of funds and you should receive much more than money in return. Most venture funds will syndicate their investments with like-minded firms and provide assistance with recruiting, technical experts, prospective vendors and customers, and other service providers.
What written materials should I supply for consideration?
You do not need to have a complete business plan if you are raising capital for the first time, but a two-page executive summary which describes the background of the management team is a minimum, along with a description of how much money you need and for what purposes.
What are a VC's criteria for investment?
Most VCS will consider the following.
Geography. Venture investing is a hands on proposition. The VC should be able to easily visit your facilities in order to assist you.
Management. A complete team that has relevant experience in the area of the new endeavor and has managed similar businesses in the past is generally preferred but usually not the situation. Especially important is technical expertise with the product line and marketing knowlege of the focus area.
Market. Ideally, VCs would like to build companies that are worth over $100M. These opportunities have the best chance of entering the public market if they are number one, two or three in their field. This leads to markets that have the potential to exceed $1B, even though they may be much smaller today.
Products. Your product should be differentiated with barriers to new entrants or large suite suppliers. Commodity materials, distribution and retailing, and service companies seldom meet this test.
Investors. Most VCs seek to co-invest with other VC firms or angel investors. It gives a VC comfort if another firm is also interested in your company.
How do we get a meeting with a VC?
Most VCs rely on referrals from other VCs, law firms, accountants and service providers. If you do not know anyone affiliated with a VC firm who can make an introduction, it will be difficult to get a meeting
What should be included in our business plan?
Be sure you give details on the relevant experience of your team (this could be 50% of a VC's decision criteria), the competitive environment, the likely market size (including your source of market data), and a financial projection which shows history of the firm over the past few quarters and projects your expenses and revenues during the time frame in which the investment will be consumed.
Are there any sure-fire deal-killers?
VCs are unlikely to pursue a business that has any of the following assumptions:
There is no competition. While this can be a semantics issue, you need to understand your market better. If there is "no competition," then there is "no market."
We are only looking for a 2% share of this multi-billion dollar market. Every market can be segmented.
This market is so new, there is no experienced management on our team. But it will be a billion dollars in a few years?
We will do $200M in revenue in our 4th year with a 40% pre-tax margin. Only one company in 10,000 achieves such results.
How soon can I expect a response?
VCs deal first with their existing portfolio and their Limited Partners, so it may take a week or two for an initial response if you meet the criteria.
What happens next?
The VC firm will schedule an initial meeting and go through a process of due diligence which includes looking at resumes and references of the team, customers, other investors and technical experts in the field. An average VC firm will do this for about 100 opportunities per year.
If initial investigations are promising, the VC firm will hold additional meetings to explore the type of investment syndicate which would appeal to both parties and do more in-depth research. The process of reaching terms for an investment (term sheet) can take from 3 weeks to 3 months or longer.
Where else can I get information related to venture capital funding?
We work with many leading law and financial institutions. Click here for a list of companies that can provide you with more information and assistance.