Six months ago I launched a company that is building a platform to help the media industry manage its people and fill open positions. To date, my startup has been funded through personal investments from individuals. But since we’re now seeing a strong response to the product, it makes sense now to build the business at a faster rate and across more industries. This will involve hiring more employees, which will cost money. The business clearly requires more investment to grow.
While there are a number of ways to fund a business at this stage, venture capitalists -- also known as VCs -- are usually best suited to fund technology companies like mine. VCs have ready access to large amounts of capital and vast experience building successful technology companies.
Despite how it may appear in the business news, though, raising money from VCs is not simple. Some firms only invest in certain types of startups. Others invest when a startup has reached a certain size. Some VCs have plenty of cash on hand to invest, while others are tapped out. Ultimately, there are far more startups that need money than there are VCs to provide it.
Given this, if you’re an entrepreneur, sometimes the tendency is to take money from whoever offers it. “Money is money,” some people say. But over the years I’ve learned that not all VCs are created equal. Here’s what I look for:
They get it. When a VC quickly understands what you are building and why the product is necessary, it makes everything else go much more smoothly. A more drawn-out process to understand the business model can be a red flag. Often it means VCs don’t have experience in building a business like yours.
Chemistry. A lot of initial meetings with VCs are a test to see how well you get along. Like a blind date, you know pretty quickly whether or not there’s a fit. Having some common ground and a shared sense of humor is important, especially if you end up working together.
Responsiveness. Venture capitalists get a crazy amount of email and phone calls each day. Despite this, if a VC can get back to me in a reasonable amount of time, it shows that he’s serious about working together.
Connections. I recently had a VC provide me with a sales lead that turned into a customer. This is smart for two reasons. First, it demonstrates that the VC can do more than deliver just money to the business. Second, for the VC it shows that the product I’m building has an immediate application.
Informality. When a VC wants five-year sales projections before taking a meeting, my alarms bells start to go off. The best VCs I’ve met recently have stopped asking for long-form Powerpoint business plans, at least in the initial stages of the conversation.
Entrepreneurs and VCs are different types of people. Founders have all of their eggs in one basket -- their startup -- while the VC diversifies his or her risk over multiple companies. Many VCs have a business school degree, while founders come from more disparate backgrounds. But with the right screening process you can improve the chances of a productive partnership.