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Bill McCready
Evaluating a Venture Capital Firm
What is the best way to approach and work with a venture capital
firm? What do venture firms look for in evaluating a new
company? How should the entrepreneur go about evaluating that
firm and any financing it might provide his company?
Venture firms are as different as entrepreneurs. There is thus a
wide range among these firms in terms of their industry
expertise, business experience and, most importantly, their
ability to work effectively with you.
Your process of selecting a venture firm is, therefore, much
more analogous to the selection of key managers in your company
than it is to the selection of a bank for a loan.
· "With a banker, the appropriate question is "How much money
will he give me?"
· "With a venture firm, the right question is "How much money
will he make me?"
This is because your venture firm, if used effectively, will be
an important element in the continuous decision making process
of your company. The venture capitalist can bring a broad
perspective of experience to your corporate problems based on
multiple other corporate situations in your industry with which
he has been involved.
This experience enables him to recognize patterns within your
company and industry niche which may be invisible to you. For
example, he would be aware of external factors beyond your
control which are already influencing other market niches in
your industry and which your company will either capitalize on
or be limited by.
When you select a venture firm, you are likely to be embarking
on a relationship that will last five to ten years or more and
which can be a pivotal factor in turning your company into a
major enterprise. Because of the rate at which a high growth
venture company encounters new challenges, decision making times
can be greatly shortened. Therefore, the relationship with your
venture firm can be critical.
A talented venture firm reinforces management's naturally good
instincts on solving corporate problems and discerning industry
directions. The less experience you have in some matters, the
more you may need to rely on your venture firm's advice. The
more experience you have, the more you will appreciate the
quality of the advice.
The venture firm's investment makes it uniquely dedicated to
your success. Venture firms only succeed; if you succeed and
this frequently depends on their ability to persuade you to do
what is in your own self-interest.
Therefore, the key question to ask in evaluating a venture firm
is: do you believe that you can develop a relationship with the
firm such that your confidence in it will accelerate your
problem solving and decision making to enable you to emerge as a
world class competitor in your industry?
Top Tier, Second Tier, Third Tier?
Everyone wants a top tier firm. The fact that they only fund
1/1000 plans should be reason enough to keep your options open.
If you are lucky enough to be negotiating with a top tier firm,
you will most likely be giving up more equity than a lower tier
firm. The trade off for their help and connections is that a top
tier firm will nearly guarantee you the entrees and support you
need, where a lower tier firm may not have either the
connections or the capacity to assure you second and third round
funding.
Here is one example we ask our client companies to consider. If
you had a choice to get the same money for different equity,
which firm would you choose?
+ Top Tier, 35% of equity
+ Second Tier, 30% of equity
+ Third Tier, 20% of equity
Be sure to investigate the venture firms portfolio companies,
their current status, co-investors, and how these funded firms
interact with the VC. Remember "There is always more money
looking for a good deal than there are good deals looking for
money." Be cautious and don't dive for the first check.
Need more detailed information, checklists, sample business
plans or completed spreadsheets, Powerpoint presentations and
capitalization structures? Check out the Venture
Planning Associates
http://www.ventureplan1.com/t.asp?id=!!!id!!! home site. Or
for a complete table of contents of all seven venture capital
reports reporttoc@sonic.sparklist.com
Venture Planning Associates, Inc., http://www.ventureplan.com
Tel. 858.457.3434 / efax 425-955-7531
capital@ventureplan.com
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