How to Determine Whether a New Company is a Good Candidate for Venture Capital Funding
Venture capital (VC) firms invest more than $30 billion in almost 4,000 companies annually, according to the National Venture Capital Association. That is an encouraging statistic. But compare that with the total number of new businesses opened every year-almost 700,000, according to the Small Business Administration (SBA)-and it becomes clear how few companies make good candidates for VC funding.
Venture capitalists seek a special blend of qualities in new companies they fund. Additionally, many companies would not benefit from giving up some control to a VC firm. Before pitching a business to every VC in the country, consider the following.
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Instructions
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Answer the most important question: "Can this new company grow quickly and go public or get bought out within three to seven years?" If the answer is yes, the company might be a good candidate for venture capital funding, according to the National Venture Capital Association.
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Determine whether the company competes in any of the following industries:
Biotechnology
Software
Industrial/Energy
Medical Devices and Equipment
Semiconductors
Media and Entertainment
IT Services
Telecommunications
Financial Services
Business Products and Services
Electronics/Instrumentation
Consumer Products and Services
Computers and Peripherals
Networking and Equipment
Retailing/Distribution
If so, the company could be a candidate for VC funding. Those are the industries most often backed by VCs, according to PriceWaterhouse Coopers.
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Hire an independent market research firm to produce a report on the target markets of the company. Include demographics and psychographics of each customer segment. If the results show a large and growing market for the product or service the company offers, it might a good candidate for VC funding.
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Confirm that there is something that makes this company uniquely positioned to find success. It can be a great management team, a product or service no one else can deliver, strategic partnerships as portals to key markets and other unique qualifiers. Such qualifiers are called "barriers to entry," which go a long way in proving to VCs that the company can keep its customers out of the hands of future competitors.
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Assess the management team of the company. Do its members have a track record of success in growing new companies quickly and efficiently? Do they have deep experience in the industry in which the company competes? If so, this increases the odds that a VC will fund the venture. As the old investment saying goes, "Bet on the jockey, not the horse."
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Tips & Warnings
Write a business plan. That process will help you to determine what kind of financial backing you need: seed money, growth money, expansion funds, etc. You might be better off bootstrapping the company yourself than seeking investors or lenders, who could potentially wrest control of the company from you.
References
- Photo Credit business man image by Dmitri MIkitenko from Fotolia.com
