TNJ - March 2000 - Finance 2000 - Does Your Business Qualify for Venture Capital?

Does Your Business Qualify for Venture Capital?

You’ve heard that venture capital firms are eager to invest in early stage enterprises such as yours. Goodness knows your little business is hungry for capital.

But can it qualify for the funds put into early stage companies by investors who take an ownership stake in hopes of cashing out profitably in a few years—the venture capitalists?

Yes, industry experts say, if its profile matches what venture capitalists are attracted to these days.

Qualifying Companies Your small business probably can get venture capital, if:

It’s a technology-based company. “Technology-based companies are far and away more favored,” says Robert Cross, president of Venture Capital Online Inc., www.vcapital.com, in Chicago. If you’ve got a hot new product, process or service in the information technology, biotechnology, wireless, Internet devices or software industries, you might easily get some venture capital.

It’s a business-to-business company. Companies that sell to other companies don’t have to spend as lavishly on advertising as business-to-consumer companies, notes John Martinson, managing partner at the Edison Venture Fund in Lawrenceville, NJ, www.edisonventure.com. That makes them attractive.

It has rapid growth potential. It has a realistic prospect of growing into a substantial company first, says Cross. “‘Substantial’ usually means in the tens of millions of revenue in 3 to 5 years.” A super attractive candidate might ramp up to $100 million to $200 million in that time, he says.

• Its management has considerable experience. It knows the ins and outs of the industry and has the knowledge and experience to successfully carry out its vision.

It needs an initial investment of $3 million to $10 million. If your business only needs, say, $200,000 to $500,000, forget institutional investors. They don’t want to lend such small amounts. Try angels; the venture capitalists who look at smaller deals.

Its product or process is unique or proprietary. If nobody does it the way you do, or you can patent, copyright or trademark it, competitors won’t be able to copy it. Venture capitalists will like that. Useful Resources Where can you look for venture capital on the Internet?

www.vcapital.com. Click on “Meet Our VCs,” a national directory of venture capitalists and some of their representative investments. Note who’s getting funded. Then explore the site for free advice and resources. Think you’re ready to get paired with a venture capitalist? Click on “Click here to raise capital.” It’ll cost $200. Expect to spend a day filling out templates that include: An electronic version of your business plan; a statement about what makes your company sizzle; the makeup of your management team and advisory board; an analysis of your customers and competition, your five-year income forecast and capital-raising strategy.

Tip: Fill out an abbreviated description of your company to find out whether you’re likely to find a match. More venture capital sites: www.nvca.org, home page of the National Venture Capital Association, Arlington, VA; http://ace-net.sr.unh.edu, the U.S. Small Business Administration’s ACE-net site; www.ventures.com, site of CMGI Inc. in Massachusetts, which funds Internet companies. For industry news and events, go to www.alleycatnews.com. What Is at Stake? Once you find a venture capitalist, here’s what you’ll have to give up:

A stake in your company. CMGI, for example, took a 29 percent state in Buyingedge.com, a Redwood, CA, e-commerce auction company, in exchange for a $10 million investment. The Edison Fund typically takes 10-40 percent equity in a business. Other VCs take a substantial controlling interest.

The privacy of running your business alone. A venture capitalist will look over your shoulder and guide the running of your firm in order to assure an attractive return on investment. At the Edison fund, “we’ll meet with you several times a month and talk on the phone frequently about big issues,” says Martinson. The more nurturing, incubator-type venture capitalists like CMGI provide heavy administrative, management and marketing support. So, does your company fit the profile? If you answered yes, there’s probably a venture capitalist out there waiting for you.

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