How to Find the Right VC for Your Company

It's critical for entrepreneurs, when targeting venture capital firms, to narrow their search based on key criteria

A few weeks ago, I talked to the founder of an upstart tech company. From what I could tell, his company was a good fit for a Series A venture capital round. However, he wasn't able to get any interest. What was going wrong? Well, it looked like he was targeting the wrong VC prospects.

This is certainly a common problem—and can mean lots of heartache for entrepreneurs. In fact, the funding process can be time-consuming and may even distract a company.

So when you target VCs, it's critical to narrow your search based on some key criteria. Of course, you want to look at those firms with a background in your industry. That is, how many deals have they funded in your category? Next, look at those VCs that are within driving distance. While this sounds a bit odd, it's important because VCs want to be fairly close to their investments. Then study the VC success rate: How many companies have been sold? How many have gone public?

Honing Focus

Interestingly enough, the CEO of Parascale, Sajai Krishnan, used this process when securing a recent $11.37 million Series A round. When he started the process, he had a pool of about 20 VCs. From there, he tried to learn as much about each one, attempting to find those who consistently invest in his space.

This made things much easier in the funding process. After all, there was no need to educate the VCs. Instead, they were ready to talk about some granular details (it also meant Krishnan had to prepare intensely for his pitches).

Ultimately, Krishnan focused on these VCs:

• Charles River Ventures: Krishnan worked with Bruce Sachs, the general partner of Charles River Ventures. Checking out his online bio, you will notice Sachs has extensive operational experience in the network and storage industries. Charles River also invested in EqualLogic (similar to Parascale), which was sold to Dell (DELL) for a cool $1.4 billion.

• Menlo Ventures: Likewise, this firm had a notable exit in the storage industry, which was the sale of Spinnaker Networks to Network Appliance (NTAP). As for Krishnan, he worked with Menlo's managing director, John Jarve, who has been structuring investments in the communications and storage space since the mid-1980s. He was also the lead investor on a variety of IPOs, such as Ascend Communications (part of Lucent), Cavium Networks (CAVM), iBasis (IBAS), SpectraLink, and UUNET Technologies (part of Verizon (VZ)).

Database Details

No doubt, collecting such information can add up and get out of hand. To deal with this, it's a good idea to put together a simple database. There are several easy-to-use online databases to choose from, such as Zoho.

Besides fundings, you might also want to track these other details for your database:

• Company shutdowns: This could be tough information to collect but may slip out in industry trade journals or Web sites.

• M&A/IPO exits: A useful Web site for IPOs is IPOHome.

What's more, Private Equity Hub has a section that lists M&A exits.

• VC partners/directors who worked on the deal: Often, they are quoted in the funding press release. I would collect their bios from the VC Web sites.

• Lead investors: They are also mentioned in funding press releases.

In fact, the last factor can be vitally important. A lead investor assembles other investors and also conducts the due diligence and prepares the necessary documents (a process that can be expensive). In other words, if you are pitching to a follower investor, you likely won't get much traction.

Finding Lead Investors

Now, to get this information, you can set up filters with online news services including Google News (GOOG) or RSS news aggregates. Keep in mind many VC fundings are published as press releases, which you can find at PR Newswire and Business Wire (both have RSS feeds).

There are also other helpful Web sites:

• The Deal's VC Ratings

Venture Capital Update

The Funded: This site allows entrepreneurs to rate and review venture funds (there are more than 3,700 funds as well as 17,000 investment professionals).

Of course, you can subscribe to premium services. One example, PE Data Center, has subscriptions starting at $325. With it, you get access to an interactive database that includes deal terms, corporate counsel, key company contacts, actual certificates of incorporation, investment history, and even valuations (the deals are searchable by region, calendar quarter, and business sector). To get this information, PE Data Center researches hard-to-get government filings.

Collecting Criteria

And finally, there are some other high-quality premium databases:

VCPro Database 2008 ($119.95): There are profiles of more than 3,800 venture capital firms (across the world), which include criteria such as types of financing and geographic and industry preferences. The database is updated three times a year.

• The National Venture Capital Assn.'s Online Membership Directory: This database includes 450 U.S.-based VC firms, with contact information and investment preferences.

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