February 2, 2009
Venture capital in today’s economy is almost viewed as a mythical creature from the high-tech days of the late 90s. Tales abound about venture capitalists and the companies they funded. While venture capital is not as popular as it was in the late 90s when every dreamer was looking to get some, venture capital is still a major force in our economy and the fuel for many of our fastest-growing and most successful business enterprises.
A successful venture capital raise requires careful evaluation of both your company and potential venture capital firms. The first part requires an evaluation of you and your business plan. This is imperative because a partnership with a venture capital firm is similar to a marriage in your personal life. Therefore, you need to understand your business, its goals, values and its vision for reaching these goals. Remember, at one point, this business was the direct result of your (and maybe others) dreams and hard work. Therefore, make sure you know what’s important to you and your company. Which issues are negotiable and which ones are not? These are important factors in helping you select the appropriate partner to grow your business.
Understanding the industry in which your business operates is an important first step in determining which venture capital firms to target. Most venture capital firms tend to focus on companies that are either part of a certain industry and/or are at a particular point in their life cycle. In terms of industries, venture capital firms usually target those that have a history of producing high-growth companies with good prospects for quick business exit strategy's (IPO’s, sales, etc.). Highly sought after industries currently include biotech, medical instruments, health care, computer software and the Internet, among others. Certain venture capital firms focus on more traditional industries such as financial accounting services, manufacturing or telecommunications.
The next step is determining your company’s current life cycle stage, which in turn determines the applicable "round" to seek in the investment process. Most venture capitalists specialize in investing and working with firms in particular stages of the business life cycle. Usually, the individuals in these firms have substantial experience working with companies within a particular stage, thus providing an invaluable resource for their funded companies.