We are in the worst recessions in the history of the United States of America. People are getting laid off left and right, and unemployment is at historic levels. The credit markets have melted down along with the housing markets. Banks have cash but they aren’t lending it out like they used. These things make starting a business very difficult if you plan on using a bank loan to get your initial capital.
And what if you are planning on starting a high-tech company, such as an Internet company or software company of some sort? Banks have historically shied away from lending money to these types of companies because they don’t usually have any sort of physical collateral. After all, what does a software company have except bits and bites on a computer disk somewhere. That is not considered safe collateral from a bank’s point of view.
What is the solution? Venture capital… but how do you find a venture capitalist to invest in your company? You can’t just open the Yellow Pages! And besides, it’s not about finding a venture capitalist; it’s about finding the right venture capitalist. This takes research, contacts, patience, and a little luck…
Most new entrepreneurs tend to take the shotgun approach when it comes to finding venture capitalists. They throw out hundreds of leads and hope that one bites. This is usually a complete waste of time and can actually do more harm than good because venture capitalists always talk to each other.
What you want to do is take a targeted approach. Most venture capitalists specialize in a specific area or a specific industry or a specific technology. And they almost always stick with what they know best, that’s why they are so successful.
So the first thing to do is figure out what kind of venture capitalist is right for you and after that you can narrow down the list. Talk to your current accountant, lawyer, banker, and advisors and let them know that you’re looking for a venture capitalist. You can also talk to companies that already have venture capital and ask them for recommendations and advice. A personal referral is just about the most valuable thing you can get your hands on, because in venture capital, word-of-mouth is everything.
There are over 50 venture capital clubs across the country. These are places where entrepreneurs can meet to discuss ideas and share advice. Join one! Some of these clubs are hard to find and again a personal referral will go a long way. So try to find somebody who already is a member to vouch for you to get you into the door.
Yes, it is a “who do you know” type of world… and that may be frustrating for new entrepreneurs. Business owners tend to be individualistic in nature, that is why they are business owners to begin with! But in this case, schmoozing can really pay off in the end. And at the end of the day, this may be the only way to get in the door of the highly lucrative world of venture capital.