If you’ve never raised venture capital before, it’s a confusing process. Don’t worry, in this article, I’ll hand you the keys to finding the perfect venture capital firm.
You’ll learn the key factors that distinguish venture capital (VC) firms from one another, and important terms like “dumb money” and “smart money.”
Find VC Firms That Focus On Companies Like Yours
The key to finding the right venture capital firm is to find one that focuses on funding companies just like yours. This is because venture capital firms typically focus in a number of ways as detailed below.
One way in which venture capital firms focus is via geography.
Most venture capital firms prefer to invest in firms located within 150 miles of their office. This geographic proximity allows them to more easily meet with the companies with which they invest and offer advice.
There are plenty of exceptions to the geography “rule,” but particularly for initial rounds of venture capital, odds favor finding a local VC firm.
Most venture capital firms only fund companies in certain sectors. Some focus on software companies. Other VC firms focus on healthcare and/or medical device companies. Some focus on nanotechnology. And still other focus on multiple (but rarely all) sectors.
It is important to target venture capital firms who are actively seeking companies in your sector. If not, the chances of them funding you are slim.
3. Stage of Development
The final way in which venture capital firms focus is on the stage of development. For instance, some VC firms will only fund companies that have revenues. Others might insist your company, at least, have a prototype. And still other VC firms only fund companies that have over $10 million, or even $100 million in revenues.
Paring Down Your List
To find the perfect venture capital firm, find a venture capital directory (there are many of these online) and then search by geography, sector and stage as specified above. This will give you a great initial list of firms that might be the perfect fit for you.
Next, you need to visit each VC firm’s website to pare down your list as follows:
A. Portfolio Companies
Virtually all VC firms list their portfolio companies (the companies they have funded). Look at these companies to make sure they don’t include any of your direct competitors. Clearly, if they have a vested interest in a direct competitor, you must remove them from your list because they won’t fund you.
Next, look at their portfolio companies to see if any could be good partners. For example, if your product or service could help one or more of their portfolio companies, this will make them more interested in your firm.
B. Team Members
Next, review the individual team members of the venture capital firms that remain.
Particularly look at the partners of the firms and what boards they currently sit on or have sat on. This will give you a sense of the types of businesses and areas in which they have great expertise.
If they sit or have sat on a board in your industry, they will most likely quickly understand your value proposition and be in a good position to fund you and provide value (advice, industry connections, etc.).
Always Look for “Smart Money”
This “value” is important since there are two types of money: smart money and dumb money. Dumb money is anyone that can provide you money. Clearly if someone will give you a $5 million check, it’s a good thing.
However, smart money is always better. Smart money is the $5 million check plus intelligence and help. If an investor can provide advice, introduce you to customers and partners and potential team members, that’s value that could help your company ultimately be successful.
In summary, to find the perfect venture capital firm, start by finding firms that fit your geography, sector and stage. Next, pare the list down by looking at who they’ve funded and their team members.
Then, reach out to these team members (email is best) with a compelling message as to why they should speak with you and learn more about your business.
Finding Venture Capital Infographic
Below is an infographic of this article for quick reference.
To further help you find venture capital, we put together the slide presentation below to show you “The 10 Most Common Mistakes Entrepreneurs Make When Raising Venture Capital” so you can avoid them!