After the success of our entrepreneur poll on the best ways to raise capital (The 8 Best Ways To Raise Capital – Entrepreneur Poll Results) I thought it would be a useful exercise to learn more about what venture capitalists look for and how entrepreneurs can best present themselves to make a VC say “yes!”
This is part one of a mini series dedicated to venture capital that I call “The Entrepreneur’s Guide To Venture Capital”
Investment Amount
The first thing to understand about venture capitalists is that they usually like to invest $500,000 or more into companies. If you’re not going to need megabucks for your business then you should turn to angel investors (wealthy individuals), friends and family, or traditional sources such as banks.
Investment Rounds
Venture capitalists also like to buy into investment rounds. They look for companies who will have a steady need for cash as the businesses grow and will need help in each stage of growth. For example, you might need $500,000 today but will also likely need another million or two six to twelve months down the line.
14 Things VCs Look For
1) Lifestyle vs. Gazelle
Most entrepreneurs run lifestyle businesses. They set their own hours and run their companies to support their outside lives. If you want to take Friday off, you can! If you want to catch up with your Facebook friends while at the office, you can! Feel like sleeping in, go for it! You might figure that as long as the work gets done and you’re putting in your hours then it doesn’t matter. That’s a lifestyle business.
If you want to build your business to the point where it runs on autopilot and your staff will take care of everything for you (which most people do) so you can go golfing or start something else, then that’s a lifestyle business.
VCs don’t invest into lifestyle businesses. They want Gazelles.
Gazelles are the entrepreneurs who run high growth businesses, are putting in 80-100 hour weeks, and would sell their left arm if it meant their business would be successful (alright that’s a bit of a stretch but you get my point). You’re going to have to work hard once you get VC money and you’re going to have to show the VCs beforehand that you’re the type of entrepreneur who wants to work that hard to make your business succeed.
If you’re not willing to put those kinds of hours in and make the sacrifices that go along with it (no social life, family life, personal life, etc) then you not a good candidate for venture capital money.
2) Related to their area of expertise
Venture capitalists often set up funds to target a specific market segment. For example, a VC could open a fund that targets software or biotechnology or energy or telecommunications. The VCs hire people who know those market segments to run the fund.
The common sense strategy, therefore, is to look for the VCs who are investing into your industry. Do they have a fund set up that specifically caters to the market you’re chasing? If you are in the wind energy business then you want to target energy funds and not software funds.
A quick look to the websites of the various VCs will show you which funds they’ve create and where they are investing.
On Friday I’ll continue the series and take a deeper look at what VCs want to see from entrepreneurs.
