How to Get Venture Funding, page 3

Different Kinds of Venture Capital Funds

There are different types of venture capitalists. Some VC organizations specialize in early-stage start-ups; others specialize in nearly public businesses with hundreds of employees. (See “Different Stages of VC Funding” for more information.)

In addition, some VCs are generalists, while others focus on an industry or theme (for example, “telecom” or “enterprise software”). In some cases those special interests are dictated by the source of the VC funds; in others they reflect the interests and expertise of the fund’s managers.

In structure, most VC organizations are partnerships with general and limited partners. The general partners and their staff make “buy-side” investment decisions; the limited partners are passive investors.

Limited partners are often institutions such as universities. They may also be wealthy individuals or families.

From the viewpoint of institutions with an endowment to invest—for example, Stanford University—venture investing represents one of the asset categories with which they want to be involved. From the viewpoint of the VC, money is raised from institutions and wealthy individuals that the VC can then allocate for investments in start-up ventures. Obviously, raising money for their funds is a priority for VCs—and one that takes a great deal of time.

The decision makers at a VC usually are general partners, although associates, analysts and technologists can also be important. In terms of their role within the VC organization, general partners make the bottom-line decision regarding investments.

Most VCs are shorter on time than money. That means that one of their criteria in deciding to make an investment is how much of their time it will take for a venture to succeed. Do they have the time to sit on your board and do all the other stuff that is necessary? How much work will your venture entail (less or more than other ventures)? Will you and your team be fun or a pain to work with?

To justify their time commitment, many VCs consider the size of their proposed investment. The amount of time they can spend is roughly constant across deals, so they have to put a certain amount of money in to make it worth their time. Using this logic, VC firms can be categorized by the minimum deal size they are prepared to do. You should make sure that the size of your prospective deal meets the needs of the VC firms that you approach.

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