How Do Venture Capital Firms Find Companies?
How do venture capital firms find companies? The answer varies by firm, although most rely on networking with service providers and industry experts.3 min read
2. The Capital Investment Process
3. Considerations When Seeking Funding
How do venture capital firms find companies? The answer varies by firm, although most rely on networking with service providers, industry experts, and colleagues. However, adding modern strategies to this traditional framework has the potential to source additional promising opportunities for investment.
Strategies To Seek Investments
- Look for signs that a specific company is growing and would thus welcome an outside investor, as opposed to companies who are not open to working with a venture capital firm. For example, you can check job boards and internet traffic reports to find businesses that are rapidly expanding and likely need funds to do so.
- Be transparent about your firm and your investment strategy by discussing your business on your website or blog. Although this level of indiscretion was once frowned upon in the industry, up to 15 percent of active venture capitalists now have an online presence that increases their investment opportunities by positioning them as a trustworthy expert.
- Use targeted investment platforms like Angel List as well as traditional social media venues like Facebook, Twitter, and LinkedIn. You can search for opportunities to seek early-stage investments as well as to join investment syndicates. The Gust platform is currently used by Harvard Business School Alumni Angels of Greater New York to drive fast-track referrals. This provides a near-perfect success rate of sourcing new investors by leveraging the networks of existing members.
The Capital Investment Process
Venture capitalists (VCs) gather applications from companies that are seeking funding. This stream of investment opportunities is called deal flow. The higher the deal flow, the more likely that the VC can fund promising ventures. These applications are reviewed and some of the companies are invited to submit a pitch. The VC conducts due diligence on his or her favorite pitches.
During the initial screening process, the VC considers four factors:
- An exciting idea in a promising market.
- An experienced management team with a stellar track record.
- A product or company with industry-leading potential.
- The potential for an initial public offering (IPO) or many potential strategic buyers.
- The potential for a 1,000 to 3,000 percent return on investment in three to seven years.
Companies that fulfill those requirements are invited to meet with the firm and present their funding pitches. During the due diligence process, the VC dives deeper into the history, background, and finances of the company in question to make an informed investment decision.
If you're asked to pitch for a VC firm, you should create a pitch deck. This is a presentation with information about your products and services, the problems they solve, your business model, risks and barriers to market entry, industry size and growth potential, marketing strategy and target audience, executive team, valuation story, and investment strategy.
Considerations When Seeking Funding
New companies have various funding sources to consider, including but not limited to the following:
- Loans and lines of credit, including Small Business Administration (SBA) loans backed by the federal government, traditional business loans, and accounts receivable-based factoring loans.
- Friends and family members with an interest in supporting your venture financially.
- Angel investors who are similar to VCs but use their own money instead of funds invested by others, which gives them more flexibility and freedom.
- Crowdfunding platforms, which also provide marketing buzz.
- Organic growth, in which you invest all profits back into the company beyond what you need to live.
Investors in all categories will want to see that you are a good risk by reviewing the financial milestones you've achieved thus far. This doesn't necessarily mean you need to be bringing in revenue or creating profits to get funded.
Ideally, VCs want to fund a unique service or product with a wide market rather than a niche product that only has appeal for a small audience. The product should have the potential to make a profit, meaning that it can sell for more than the manufacturing cost. They also want to make sure that your product or service meets all applicable government regulations.
An outstanding management team is one of the most important resources for small business growth. Hire executives who can connect with strategic partners and effectively market your offerings.
Avenues you can use to find VC firms include:
- Accountants, lawyers, and bankers who work with your business.
- Pitch and networking events that allow you to meet potential investors.
- Business incubators that provide services, advice, and resources to new business owners
- Searching the database of the National Venture Capital Association.
If you need help with how venture capital firms find companies, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.