Over the years, Venture capital has become one of the key funding sources for start-ups and mid-sized businesses seeking to expand. In fact, a recent “State of Venture” report from CB Insights claims that 7,651 deals resulted in the raising of $108.5 billion in venture capital funding worldwide during the second quarter of 2022.
Well, it’s not too difficult to understand that venture capital is one of the most crucial sources for funding new business costs, expansion, and growth acceleration.
But the process of finding and selecting the right type of venture capital may seem like finding needles in haystacks, especially to first-time entrepreneurs.
If you’re serious about identifying and selecting the right type of venture capital to finance your small business or start-up, you’ll need to be very systematic with how you hunt down leads.
Otherwise, it will be difficult for you to acquire the right type of venture capital investment for your business.
Well, this article will discuss 7 crucial factors to identify and select the right type of venture capital firm for your start-up or small business.
1. Product & Industry Fit
Most venture capital investors have a distinct focus in terms of the types of companies they want to support.
Given this, it’s always a good idea to compile a list of VCs who are likely to be interested in your business, both in terms of industry and the line of products.
In terms of revenue growth, user base, and product fit, look for VCs with a proven track record of investing in your industry and those that have previously worked with businesses that are comparable to yours.
While it’s true that a vast majority of reputed venture capital investors have moved towards diversifying their portfolios in recent years, conducting thorough research should allow you to get a clear understanding of the type of businesses these VCs are looking for across a wide variety of industries.
2. Stage and Alignment Fit
Identifying the right type of venture capital investor for your upcoming round of fundraising will greatly boost your company’s credibility. But it makes sense to mull over if the VC of your choice is on the same page in terms of your business goals.
Find out if they support your product plan or do they believe that you may achieve more success by taking a different course. Also, try to identify if you’ve enough faith in their mission and background to follow their recommendations even if your firm and your vision for it are not exactly in sync for the next three years.
When selecting what businesses to fund, many VCs concentrate on various investment stages (Seed, Series A, Series B, and Series C). To improve your chances of grabbing their attention, you should look for VCs that actively fund businesses in your stage and favor partnering with businesses comparable to yours.
3. Reputation and Track Record
You’ll be surprised to know that not all VCs have that solid reputation. But the good news is that the investor community is very small and close-knit, making it relatively simple to screen the right type of venture capital investor for your business through networking.
Don’t be hesitant to get in touch with founders who have dealt with the VCs of your choice in the past to find out about their experience. Talk to the founders of their portfolio companies that fell short of their objectives, if possible. Relationships are simple when everything goes well but look deeper to see how these VCs react when things aren’t really going so well.
4. Industry Knowledge & Network
The money you’ll get from an investor is only the very beginning. The ability to use their network and experience is crucial to your development.
It can be quite beneficial to have someone in your corner who has extensive expertise in assisting businesses to scale successfully and has a vested interest in your success.
Make sure you are looking at the right type of venture capital investors who have a solid track record of working with businesses comparable to yours that have been able to secure further funding fairly easily and quickly from either the same or equally well-recognized financial institutions if you already know you will be pursuing Series B and possibly Series C funding in the future.
5. Authority & Decision-Making Capability
If staying true to your vision is a top priority for you, you should look for a venture capital firm with a track record of placing trust in and providing the necessary support for its portfolio companies.
You should be able to tell whether the VC fully supports your mission and vision based on earlier conversations and questions.
It’s important to strike a balance between having a board that believes in you and your vision while also being watchful to offer you advice and make sure you’re always heading in the right direction.
After all, no business owner wants a VC partner who is uninterested.
6. Terms & Conditions
Don’t simply concentrate on the assessment and the compensation when going through the term sheet; take a closer look at it to understand more about the vision of your intended venture capitalist partners, their goals, and their intentions. Try to identify if the offer is clear and simple to understand or if is there a lot of fine print and ambiguous clauses. Does it appear that they’re putting pressure on you to accept something that doesn’t sit well with you?
Expect things to remain unpleasant if you are overburdened by the early paperwork for the Series A venture capital fundraising.
7. Geographical Location
Remember, location matters. Every stage of funding and growth demands a lot of face-to-face contacts, from initial meetings to quarterly board meetings, discussions of additional rounds, and potential exit alternatives.
Additionally, VCs favor investing locally. It is not surprising that a vast majority of companies and investors are concentrated in a small number of cities, with Mumbai, Delhi NCR, and Bengaluru, hosting more than 80% of all venture capital investments.
The remaining 20% of investments are what are needed by companies that operate in various geographies.
VC firms are, however, more willing than ever to make investments outside of their home areas, so if you think you would be a wonderful fit elsewhere, don’t be afraid to reach out to VCs outside.
Over to You!
Remember, the right type of venture capital investor is crucial for any new business. Millions of dollars are involved, there are long-term connections, and hopefully, your new business will grow exponentially as a result.
When looking for venture capital investments, more money on better terms is always the desired outcome. But there are times when it can be beneficial to give up some equity or incur losses to collaborate with the ideal VCs.
The importance of expertise, reputation, and alignment is equal. Keep in mind that these are committed partnerships and that you shouldn’t hurry into them.