The numbers tell us that, in 2012, it's getting harder, not easier, to attract venture capital.
Evidence, as reported this year in Entrepreneur: There were some $31 billion moving from venture capitalists to companies in 2007. But in 2011 investors gave startups just about $18 billion.
Given such circumstances, the wisdom must be that a company ought to take what they can get, from where they can get it, right?
As a matter of fact, no. It is important for small-business owners to think differently about this equation.
Identifying and carefully choosing your venture-capital opportunities is a key move you'll make as a startup, and, in the short term—as well as over the long haul— having investors on board who are the right candidates to help guide your venture toward success can be the difference between celebration and frustration.
Let's look at five reasons why the source of your venture capital is as important as the investment itself.
1. The right venture capitalist will know your kind of business. You want to work with investors who is not only possess deep enough pockets to help your new company go from proof-of-concept to stable execution, you want investors who inherently understand your business model.
They don't have to be experts in your industry (although that can be helpful), but they can't be lost about your sector either. They need to have some contacts. You need to share a common business language.
Discovering early on whether this is the case will save both parties from potential disappointment later in the process.
2. The right venture capitalist will respect your startup timeline. When your development team is deeply invested in creating the material that will prove your new business likely to work, the interruption(s) of a dozen venture-capital meetings can undo important momentum. Inside your new business's four walls, you need the proper time to focus on what will make your startup shine. The venture capitalist that you want to work with is the one who understands that the shorter, 30-minute meeting during a startup's design and roll-out phase is normal. In fact, it's encouraging. It's clear the focus of the new business is in the proper place.
3. High-caliber venture capitalists will attract high-caliber teammates. The old adage, "It's not just what you know, it's who you know," applies in this case. So while your team may be packed with smarts, growing a start-up small business is also about having intelligent hot shots under your roof. Getting a well-known venture capitalist on board—one that is right for your company—can translate to an increased likelihood that your project is going to similarly bring in new, industry-recognized team members. And that can lead to further venture capital.
4. The right venture capitalist will understand your equity resources. When you're working with an investor who has the financial wherewithal to help fund your startup, but who also gets that they may not be the last venture capitalist through your door, they comprehend that you're going to want to hold back some of those shares to facilitate later rounds of funding. A well-chosen investor is one that sees the benefit in your idea having the chance (and the resources) to grow further.
5. Good money after good: The right venture capitalist is an entree to new investors. This leads us to the fifth and final point: choosing your venture-capital partners wisely should stand to create pathways to other investors who see your small-business startup as even more worthwhile because of the company that you keep. People can feel encouraged to throw good money after good. It's another example of how sourcing your venture capital to the right names and faces means something more significant than just that initial cash infusion. That is, finding the right investors is an investment, on your part, of time and effort in your startup's funded future.
In addition to writing about social media and content strategy, James O'Brien blogs for Contently about business, politics, technology, and travel. He has contributed as a ghostwriter to several recent publications on the media, technology, and social change. He has written extensively as a news correspondent for The Boston Globe. He joined the caption-research team for photo-essayist Rick Smolan's new book, The Human Face of Big Data, in 2012. James blogs via Contently.com.