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What is the best way to find a venture capitalist?

March 9th, 2008 · 6 Comments

Asked on Linked in, here is the compilation of my answers and Justin Townsley‘s answer.

Venture capital institutions are easy to find through a Google search. Many Venture Capital firms today are really interested in providing later stage growth financing than the early stage rounds that the name would suggest. If it’s early stage, you’ll find recommendations in order for the stage that most investment types come in: 1, 3F’s (family, friends, “fools”), 2. angels and high-net-worth private individuals who like to invest speculatively in such situations, 3. private equity investors (essentially very HNW angels), 4. private equity funds, 5. VC and/or mezzanine funds. Often times, by the time you’re in a position to attract VC/mezzanine funds, you ought to be able to secure debt through an alternative lender you will provide a line of credit or purchase order financing, and avoid further dilution. 

You can find VCs via many directories, but getting their attention is a whole other thing indeed.  The best thing for you to do is to get a one-page description of your opportunity and what stage it’s in, then circulate it for reaction among a short list of prospects. The one pager is a start, but the business plan must be impeccable and compelling or it will just be circular filed.   

It is important to understand two key distinctions between private investors such as Angels and Venture Capital firms.   Private Investors or Accredited investors (angels) are investing their own money, they have many options and choices (taking a vacation around the world or investing in your business), they want to get a pay raise on their money if they are going to move it from someplace it is making money for them now and put into your business, they don’t often have negotiating power (nature of a PPM) so if they think the terms are off because the founder has set the valuation too high, they just walk, because to them, and this is the clincher, nothing bad happens if they don’t invest.   They believe they will have another opportunity on another great deal next month.

VCs on the other hand are money managers that have raised funds from Trusts, Super Angels, institutional funds etc.   They are paid a fee to manage that money by investing in companies which meet specific criteria with the expectation that it will produce a multiple on the money.   If they do not invest it on a regular schedule and by certain dates, then they have to return the money and they don’t want to do that.   Because they are managing $100m let’s say, they must make larger investments than what the typical angel invests because they can only effectively manage 20 or less companies within that fund.   Since the invested amount of money is larger, they have leverage to negotiate terms and drive the valuation down to get a greater % of the company relative to the investment at the angel round.   This is an ongoing challenge for companies to assess their current stage and the appropriate amount of money for their stage and industry, and most importantly, not chasing dollars that they won’t qualify for because of the mismatch  in industry, stage, and value.

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Tags: Entrepreneurs Seeking Capital Corner · Just Ask Karen!

6 responses so far ↓

  • 1 fundcafe // Jul 17, 2008 at 8:20 pm

    i found a venture capitalists database at http://www.breadstreetinc.com/
    Can you suggest other resources?

  • 2 Sara Miester // Nov 29, 2010 at 11:12 pm

    It is good to know that busiensses are still getting funded by VCs.

  • 3 Vivian Thompson // Nov 30, 2010 at 10:17 pm

    Have been wondering about venture capital for early stage compared to money from angel investors. This post helped sort it out. Thanks.

  • 4 wilkinson Kane // Dec 10, 2010 at 1:18 am

    I am finally getting it and what it really takes to attract VC funding. Your website, blogs and radio show really help. I’m a fan.

  • 5 ebsblog // Dec 10, 2010 at 8:08 am

    Thanks Wilkinson. We try to put the information out there that will help entrepreneurs so they can do as much as possible on their own before spending money on professionals.

  • 6 Ed Harness // Dec 25, 2010 at 1:28 am

    Hi, thanks so much for this post I am an entrepreneur myself looking for funding this is helpful. Much thanks.

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