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6 Things to Know About Picking the Right Venture Capital Firm

Apr 2, 2015 11:38:19 AM

There is something very exciting about entering a partnership with a venture capital firm. Getting to that point can be seen as a sign of success. It is often one of the most important steps for a start-up company as it expands its business and builds a financial stronghold for itself.

Investors, such as VC firms, can be just what a young start-up company needs as it navigates the uncharted territory of business growth and financial stability. These firms have the unique ability to catapult start-up companies into a new realm of growth, allowing them to start looking at the future in a whole new way.

Venture capital firms have just that – capital. It’s their capital that injects new lifeblood into a start-up company's business growth. I view it like a marriage or uniting of two partners, the investor and the start-up company, both ready to take the next step together. However, like any marriage in real life, it’s important to get to know and understand what you’re getting into and be ready to commit for the long haul.

The first step is to understand the preparation that needs to take place before entering into those initial conversations with this type of investment firm. Nobody enters these conversations blindly. For as much research as a venture capital firm conducts when deciding whether to invest in a start-up company, it's equally important for the CEO to do the same amount of research in selecting who they want to partner with for many years.

This responsibility falls to the CEO and can’t be delegated – it’s that important. For example, at Vennli, it’s my responsibility to guide us down the path to strong financial growth. Even before making the approach to an investor firm, I will make sure we are in the right position to take on this type of partnership. The ideal way to do this is to identify my company’s business metrics and market opportunities. It’s my job to have all the information prepared and researched. This needs to be done before even entering conversations with potentials investors.

I also know it’s my responsibility to do my homework and thoroughly research each and every possible venture capital firm before engaging in any conversations regarding interest or commitment.

Here are a few things to keep in mind when selecting the right venture capital firm for you:

1. CONSIDER YOUR INVESTMENT STRATEGY.

First and foremost, make sure your company will truly benefit from a partnership with a VC firm. It will bring significant changes to the company. For example, terms of such a partnership could warrant a 20% ownership in the company. Make sure that the money involved equals the right valuation. In some cases, this type of investment strategy might not make sense.

Sometimes start-up companies, with a full board of directors and positive cash flow, may not benefit from collaborating with a new investor. The start-up company may find itself well suited to go forward and achieve growth on their own.

2. LOOK FOR ESTABLISHED FIRMS.

Look for established capital venture firms who have already experienced success in your specific market. This will take some research, but finding a firm who has a depth of industry knowledge in your specific market will pay off in the end.

3. CONSIDER IN-HOUSE INVESTOR FIRMS.

One trend I’ve seen is an increasing amount of major technology companies that have an in-house venture capital firm. For example, a company like Google has an in-house investor firm called Google Ventures. I like these firms because their strategy is all about re-investing their resources back into technology companies. These firms are gaining a strong hold on the market.

4. SEARCH FOR THE IDEAL MATCH.

A good fit between a VC firm and a start-up is multi-faceted. It’s all about finding an investor who has relevant expertise and has had success in your market.

Start-up companies also need to find a venture capital firm who shares the same business philosophy and company development perspective. It’s important for an investor to match up well with the start-up company’s executive management team. You have to have an alignment of the fundamentals. If you don’t have the best fit, the investment firm may bring in money but also usher in a different set of problems.

5. BUILD A PARTNERSHIP.

Once you find that perfect match, be ready to come into this partnership with confidence. Earlier, I compared this partnership to a marriage. Be ready to commit. You will be spending the next five to eight years with these people as a team, so make sure they are people you want with you along your journey. They are your new business partners, and that’s not something to take lightly. Set the tone early on for a strong partnership.

6. CONSIDER OTHER FINANCING OPTIONS.

Sometimes a venture capital firm isn’t the best option, and there are other options to consider when it comes to finding capital for your startup company. If you have an existing investor base or angel investors, and those investors are pleased with your company’s progress as well as your future prospects, they can often be a major source of additional capital.

Another option to consider is venture debt, which is very prevalent in the software industry in particular. Venture debt can provide important capital growth with a reasonable interest rate that may be more favorable to existing shareholders by eliminating the reduction of company ownership that would come with investment from a venture capital firm. If you have a sound business model, this is a great avenue of capital.

At the end of the day, you’re looking for a strong partnership with a venture capital firm who you really like, is knowledgeable about your industry domain, and will be a good fit for your leadership team and current business needs.

If you find this magic and all the stars will align, you’ll know it. That is the perfect partnership.

Topics: General

Vennli
Written by Vennli

Vennli is the content intelligence platform that empowers marketing leaders to increase the effectiveness of content marketing for each persona across every stage of the buyer’s journey - from awareness to advocacy. The smart content planning tool combines customer data and artificial intelligence, including insights about what matters most to the target market, to make intelligent content, messaging, and communication recommendations that will attract, convert, and retain more customers.

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