The process of obtaining investment funding from Venture Capital Firms, (VCs) is typically difficult and time consuming for the entrepreneur. There are hundreds of VCs and each focus on different criteria. As a result, a targeted approach by the entrepreneur may be appropriate.
VCs invest based on specific objectives and investment criteria.
By researching the VC and understanding their goals and objectives and the criteria under which they invest, the startup is able to pre-qualify itself. Armed with their research, the entrepreneur can compare the objectives and criteria of the VC with those of their startup. They can determine which of their criteria match. The startup with attributes that best fits a particular VC’s established criteria and objectives is the one with the highest probability of obtaining investment from that VC.
Here is an excellent place to start:
1. Investment Stage –
VCs have varying interests due to differing focuses and risk tolerances. A few may invest in concepts and seed level opportunities. However, most tend to prefer funding companies with fully vetted teams, a commercialized product and significant sales revenue momentum.
The entrepreneur should recognize that little value will accrue from pitching a seed stage company to a VC that invests strictly in mezzanine stage opportunities.
2. Investment Range –
VCs have differing investment appetites and strategies. Some are desirous of investing early in the startup’s development process. They participate over time at higher and higher levels, as the team demonstrates an ability to execute and the market validates the product or service. Others prefer to invest significantly larger amounts later, after such issues have been validated. Such preferences will preclude a given VC from investing outside their focus.
Knowing the VC’s investment level preference may save entrepreneurs a lot of valuable time.
3. Industry Focus –
Most VCs invest in specific industry sectors. This is because the desire to invest based on knowledge and previous experience. They develop expertise in their specific sector of interest which permits them to be very selective, improving the probability of a successful economic outcome. VCs are disciplined and are unlikely to invest in areas outside of their defined focus, despite the perceived potential of the opportunity.
The entrepreneur can address this by screening out those groups that don’t invest in their industry or sector.
4. Geographic Focus –
VCs expect an appropriate risk-adjusted return on their investment. One of the ways many VCs reduce that risk is by only investing in startups with a reasonable proximity to their location. This permits them to engage and coach the team, sharing their experience, and provide networking support. Many of the larger VCs have multiple offices which enables the portfolio company to pursue an investment from a broader range of geographic locations. Notwithstanding, the entrepreneur should recognize that relationships are important in this industry and that interest from one office may not automatically transfer to an office of the VC in another geography. Ultimately, the entrepreneur should recognize some VCs simply prefer not to invest in opportunities that, due to their distance, may be significantly inaccessible.
Understanding where the VC is willing to invest enables the entrepreneur to focus on those with which they have a geographic match.
By focusing their efforts only on VCs with criteria that match their opportunity and its needs, the entrepreneurs avoid the frivolous efforts of the shotgun approach, improving the efficiency of their effort.