Thursday, June 12, 2008

Venture Capital for Your Company

Venture capital funds are actually money management firms, sort of like mutual funds. Except instead of offering shares to the public, the partners of venture capital funds go out and raise money from large institutions such as pension funds. Most Venture Capital firms (VCs) are organized as limited partnerships. The partners in the firm may have some of their own money in the fund, but most of the money comes from outside sources, the limited partners. This is the major distinction between a venture capital fund and an angel investor: The venture capital fund invests money it has raised. An angel invests money he/she has earned.

In recent years, the average size of investments made by VCs has risen considerably. It is not unusual for $10 million or more to be invested in one company.

When venture capital funds raise the money from the limited partners, they do so on the basis of agreeing to invest in certain types of companies. Often the firm has a focus on one type of technology, such as networking systems. Many times, the fund will only allocate a limited percentage of its capital to early stage investments, which are inherently riskier, and devote most of it to companies that are already well on their way to success and just need capital to expand more quickly.

Entrepreneurs can save themselves a great deal of time by studying the types of investments the various venture funds have made in the past and only contacting those that are a close match with their entrepreneur’s company.

The good news is that there are many excellent directories, some online, of VC firms that describe the firms’ investment focus in great detail. Nearly all the major VC firms now have web sites that provide a wealth of information about how to contact them and about what investments they are particularly interested in making.

When preparing a business plan or executive summary to send to a venture capitalist, it is important to focus on the most important factors VCs uses to evaluate investments:

Quality of the Management Team
Size of the Company’s Market
Proprietary, uniqueness, or brand strength of the company’s product
Potential return on investment (ROI)
Company’s potential for growth

Which of these is the most important factor? Hands down, the Quality of the Management Team.

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