Finding Opportunity in the Dragon’s Den

March 12, 2009sparxoo_admin

Financing Your Business Through Venture Capitalists

By Ethan Lyon, Senior Writer

You may think of venture capitalists as just a source of funds.  And, yes, they do hold the keys to millions of dollars that can help you achieve your business goals.  But they are more than a source of funds.  They are a partner that is going to be with you in good times and bad times.  Sometimes a great partner, and sometimes a partner that you’d rather not have.  So you must find a venture firm  that is aligned with you and your company’s goals.

If you knock on every VC door, you are going to be wasting your time as well as theirs. Look at the list of companies the VC firm has invested in and see if you could be on that list. It’s important to know what to expect before going to a VC firm. Here are some points of review before you knock on that door:

Six Points to Finding the Right VC Firm

1. Start-up or Established
All VC firms want to see that you have successfully taken on risk.  Some will prefer that you have made significant progress and just need a small financial boost to take your company to the next level. Others will be more willing to invest in the initial stages of your business.

2. Internet or Manufacturing
It is important to keep in mind that VC firms can specialize in a certain sector. Before you even make that call or send that e-mail, make sure that they have a history of investing in your sector. If you are an Internet start-up it doesn’t make sense to go to a manufacturing VC firm.

3. $1 million or $10 million
Before you seek out an investor, do your homework and figure out approximately how much you need to raise.  You need to be prepared when you are asked “How much?” Once you answered this question, it will help you focus on VC firms that concentrate in the range you seek.

4. Southwest or Northeast
While some VC firms have global operations, many VC firms have a regional focus.  If you have the next big idea, you can open global or local doors.  For most entrepreneurs it makes more sense to start in your region.  Get connected locally and then branch out.

5. 10% or 100%
The return on investment varies within the investor community. Investors have differing expectations on the return of their investment. Some seek safer investments and are willing to accept lower returns.  Others are looking for homeruns and grandslams.  Find the firm with the risk / reward philosophy that matches to your business.

6. Hands on or Laissez Faire
The nature of equity necessitates the involvement of another party. However, some investors want more or less control for the same capital. It is important to understand the role the VC firm plays in the decision-making process of each investment. It might be difficult for you, the creator and father of your idea, to have an investor heavily influence your business decisions.

Looking Forward

“We expect to see further declines in the short term performance numbers into 2009 until the exit markets improve,” said Mark Heesen, president of the NVCA.  “Longer term performance will hold steady for the time being, but a prolonged capital markets crisis will begin to impact these numbers ultimately as well.”As Heesen noted, VC firms are drawing back–absorbing the shockwave of the recession. That means the investments have receded and it is more difficult to get funding. However, there are companies seeing VC dollars confidence.

As we noted in our Top 5: February Funding post, entrepreneurs are challenged to create innovative businesses that will shape tomorrow. If your company can create meaningful impact for customers, you still have a chance at being that small fraction of entrepreneurs to gain VC confidence.