Venture capital funding is provided by venture capital firms. These organizations are looking for a specific set of conditions before they will invest funds in an investee. Consequently, a company in search of cash should be aware of the needs of a venture capital firm before contacting them about a possible investment.
The following issues should all be considered when pursuing venture capital funding:
- Relevant investments. Each venture capital firm builds up an area of expertise. They have partners and supporting staff who are experts in certain industries, as well as deep connections within that area. For example, a firm may only investment in green technology or biotechnology, because that is their comfort zone. Consequently, research these firms in advance to see where they invest, and only contact those firms that have a history of doing so in the industry in which your company is located.
- Growth. Venture capital firms are deeply interested in obtaining a return on their investment of several hundred percent. This means that you must be able to present an opportunity to them that can potentially achieve a massive revenue increase within a relatively short period of time, and justify how this expansion will take place. Your argument should include a discussion of what competitors will be doing at the same time, and how your business has such a unique competitive advantage that it will rise above the competition and grab additional market share.
- Expertise. A venture capitalist that is willing to invest millions of dollars wants to put its cash in the hands of experienced business people, not raw neophytes. This means you must present a management team that has relevant expertise in expanding a business and bringing products to market. At a minimum, fill the most crucial positions with experienced personnel before approaching a venture capitalist.
- Loss of control. Venture capital firms want to take a significant stake in an investee. They will certainly want one or more board seats, and may also want some degree of control over how the business is eventually sold. Therefore, you should make it clear that you are willing to have some loss of control in exchange for an investment.
The preceding points should make it clear that the typical venture capitalist is essentially searching for a needle in a haystack. Few organizations can present an opportunity that meets VC funding criteria. Consequently, it can make more sense to use every other source of funding before trying to get venture capital funding - the odds are simply not in your favor.