If you are lucky enough to be able to choose a venture capitalist, chances are you've been successful in a previous business experience, probably a start-up. Even if you haven't worked with venture capitalists
in the past, examine these key considerations when working with a venture capitalist for the very first time.
1. Consider the Small Business Investment Companies (SBIC)Small Business Investment Companies
are part of the Small Business Administration (SBA). They were created by Congress to provide venture capital
to start-up and expanding small businesses. Even though they are licensed and regulated by the SBA, they are for-profit investment firms.
2. Check the venture capital firm's references.
Just like with a product, you do not want to buy the services of a venture capital
firm without checking references. How many successful deals has the venture capital
firm put together? Has the firm worked with a firm like yours? How successful was the deal? What about deals that didn't work out? How did the venture capital
firm handle that?
3. What About the Venture Capital Firm's Financial Strength?
Obviously, venture capital
firms must have the financial strength to support your operation and probably several other businesses. Venture capital
firms have portfolios of businesses to spread their risk; otherwise, they take on too much risk. Funding is generally in stages with venture capital
funds and you must make sure that the firm you are associated with has enough funding to see you through those stages.
4. Is There Integration Between the Venture Capital Firms Style and Yours?
Often, venture capital
firms wish to be very involved with the business of the firm they are financing. They may wish one or more seats on the Board of Directors and a stake in the ownership of the firm in the form of preferred stock. If you don't mind relinquishing some control of your firm, then no problem. However, some venture capital
firms are satisfied with monthly or quarterly reports, but obviously still have a stake in the firm since they bought an ownership interest. A large venture capital
firm may have more rigid requirements than a smaller firm. Choose a firm that most suits your own business style.
5. Venture Capitalists are Networkers
The venture capital
market is a networking and communications market. Of course, the venture capital firm you choose will help you with finance and management. The firm may also be able to offer you valuable introductions to potential customers, suppliers, banks, accountants, attorneys, and other valuable contacts.
6. Know the Exit Strategy of the Venture Capital Firm you ChooseVenture capitalists
are usually short-term investors. You should discuss with your venture capital of the firm when they will "cash out" of the business so you can plan for the future.