How Venture Capital Works

Venture capital investment is all about numbers.

Boy have we heard this one far too many times! Some entrepreneurs (we won’t name names) seem to think that finding venture capital investment for their startup company is all about contacting as many investors as possible.

Not so! Getting a venture capital investment is about quality over quantity. In this section we are going to talk about how to actually limit and reduce the number of investors you talk to in order to increase your chances of landing a venture capital investment in your startup company.

How Venture Capital Investments are made

Before you start picking up the phone and dialing for dollars or spamming hundreds of poor investors with e-mails, you need to understand why finding capital isn’t really a numbers game. To do this, you need to understand how venture capital investments are actually decided upon.

VC’s don’t make lots of investments. They make a small number of investments in very particular types of deals. Their capital investment criteria determine what deals they will even look at, much less invest in. For example, if the focus of a venture capital fund is on software technology startups, your real estate deal is not going to make it past the front door.

The reason for these criteria are the limited number of resources the VC’s have to work on the deals they invest in. A typical venture portfolio may have only 20 - 30 companies in it. That doesn’t leave a lot of room for lots of new entrants!

Do your Homework

It’s a huge waste of time to contact a venture capitalist about making an investment in your startup company if you don’t even know what types of deals a VC does.

Nothing will make you look like more of a nimrod than contacting a VC about investing your company and having no history or understanding of what that VC does. This type of introduction reeks of an entrepreneur who doesn’t know what they are doing. You don’t want to be that person.

Instead, spend some time researching what types of investments the VC has historically done. Are these companies similar to yours? If so, you stand a greater chance of getting an investment with this venture fund because they clearly understand (and like!) the type of company you are working with.

If it looks like there is just no possible connection between your business venture and the types of deals the VC has done, don’t be afraid to move on to a VC that is better suited. You’ll save yourself a great deal of effort in the process.

You Figure it Out!

You are far better off approaching a handful of VC’s with a very well-prepared presentation that explains why your business plan is in sync with the interests of the venture fund than expecting every fund to figure it out for themselves.

Venture capitalists are very busy people. They don’t have the time or attention to put toward figuring out how your deal maps back to their specific investment criteria. Sometimes you need to do a little bit of the ground work for these funds so that they can understand the connection.

Let’s face it - if you can’t find a connection between what you’re working on and what the venture fund invests in, you’re probably in the wrong place to begin with!