Choosing a Venture Capitalist

Some start-up companies, particularly those headed by experienced, previously successful entrepreneurs, will be in such demand that they will have the luxury of looking beyond the money in choosing a venture capitalist. There are some key considerations in such a case, some of which can be summarized as follows:

1. Financial strength is important. The venture capitalist needs to have the resources and financial reserves for additional financing stages should they become necessary. This doesn't mean that bigger is necessarily better, however, because of our next consideration.

2. Style is important. Some venture capitalists will wish to be very much involved in day-to-day operations and decision making, whereas others will be content with monthly reports. Which are better depends on the firm and also on the venture capitalists' business skills. In addition, a large venture capital firm may be less flexible and more bureaucratic than a smaller "boutique" firm.

3. References are important. Has the venture capitalist been successful with similar firms? Of equal importance, how has the venture capitalist dealt with situations that didn't work out?

4. Contacts are important. A venture capitalist may be able to help the business in ways other than helping with financing and management by providing introductions to potentially important customers, suppliers, and other industry contacts. Venture capitalist firms frequently specialize in a few particular industries, and such specialization could prove quite valuable.

5. Exit strategy is important. Venture capitalists are generally not long-term investors. How and under what circumstances the venture capitalist will "cash out" of the business should be carefully evaluated.

The Internet is a tremendous source of venture capital information, both for suppliers and demanders of capital. For example, the site at www.dealflow.com prompts you to search the firm's database as either an entrepreneur (i.e., capital seeker) or a venture capitalist (i.e., capital supplier).

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VI. Cost of Capital and Long-Term Financial Policy

16. Raising Capital

© The McGraw-Hill Companies, 2002

PART SIX Cost of Capital and Long-Term Financial Policy

For more VC info and links, see www.globaltechnoscan. ■ com.

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