six steps to venture capital: part 2.2/6 fund selection

this is the 2nd part of the "six steps to venture capital" guide, where the systematic approach to get venture capital money for start.ups is discussed.

part 1 covered "motivation" and can be found here. part 2 deals with the selection of potential funds. the fist section covered fund selection according to investment period, geography and focus. to complete the criteria, let's look at the remaining important criteria:

4) experience
does the potential investor understand your technology, your business model, your market? or would an investment be the “pilot-investment” for a fund e.g. in semantic technologies? if so, a lot of missionary work has to be done with the investor (so b-list). not too much support market and business wise can be expected after investment as well.
smart money, as often described when talking about venture capital, which means that on top of the money from the investor comes a lot of business contacts or business advices, is often promised but seldom delivered. check with reference calls.

on a daily business, it is not “the fund” though, which a start.up is going to interact after investment. it will be a partner and an investment manager. so besides valuing their investment history and their personal background (technology or finance, entrepreneur or big corporate, number of successful relevant exits), it is absolutely necessary, to be able to consider the gut-feeling after a first meeting with them. A start.up should ask themselves the questions: do we like this person? can we work with her also in hard times? If not, then even a otherwise perfect match is useless (lower b-list).

5) cash available for investment
finding out how much cash a fund can invest is vital. if a start.up requires 2 million € and that is all the money a fund has left, that’ b-list of even worse. regular start.ups need more money then they expect, often twice as much as projected. if the fund which did the first investment can not put in additional money the start.up might run out of cash maybe just three month before taking off. finding a new investor without the first round investor putting any additional cash on the table will be very difficult (this is often seen as: the first investor does not believe in the company any more).

6) fund exit horizon
when will the fund close? some funds run for 10 years, some are evergreens.
A ten year fund invests for five years and spends the next five to sell his investments. at the end of the 10th year, the fund has to pay the money to his investors. evergreen have no determined duration. And are therefore a-list candidates. Other funds within their investment period as well.

7) references.
references are important. venture funds will check the references of their potential project – so should start.ups. fund recommendations from fellow entrepreneurs, reference contacts given by funds and even cold calls are possible. only funds with three positive references make it on an a-list place.

recommendation: prepare ranking “a-b list” of potential funds according to 1) investment period, 2) geography, 3) focus, 4) experience, 5) cash available for investment, 6) fund exit horizon and 7) references.

coming up in the next step of "six steps to venture capital" is all about preparing the "battleground".

six steps to venture capital: part 2.1 fund selection

after being sure, that venture capital is the best choice (see “six steps to venture capital: part 1/6 on funding motivation) , the next step is to select which funds to approach.

2) fund selection

the best resources out there to find professional risk capital are the european venture capital association (evca) and the local venture capital associations, like avco in austria. on the evca webpage, all the national venture associations can be found.
Other sources are local economic newspapers, blogs (as can be seen in the blogroll, with lists like here), or the webpages of known venture backed start.ups in general, like jaja.

based on that basis research, a list can be compiled from all the vc out there, meeting the requirements of

1) investment period,
2) geography,
3) focus,
4) experience,
5) cash available,
6) fund exit horizons and
7) references.

the result will be an “a-b list”. “a” for your hot hits, “b” for the maybes.

1) investment period
start.ups will be looking for early stage, seed funding focus or even incubators. funds having no investments and no mission to do so will not make it on the list. funds having no early stage investments but write that they want to get into, are on the b-list.

2) geography
most investors stay within their local area. looking at their profile and their portfolios will tell that easily. if for example a uk fund has no investment outside of uk, chances are low, that they will invest e.g. in romania at all. if they are otherwise a perfect hit, make them a b-list candidate. we will see later why those are needed as well.

3) focus
there are different investment philosophies existing. funds can focus on investment stage or selected industries (horizontal or vertical). it is important to be in the funds focus, otherwise an application means wasted time.
if a fund has similar companies in it’s portfolio, for example three other software companies in the field of telecommunications, then that is an a-list candidate. because this fund should have an deep understanding of the technology, the business models, the market addressed. just to dig deeper on one point here: the technical due diligence will be faster and more accurate, as the funds typically use their portfolio companies to evaluate potential new investments.

coming up in the next post (six steps to venture capital: part 2.2) are the relevance of fund and investment manager experience, why cash matters and checking out the investors.