Despite today's rough economic climate, venture capital funds have not disappeared. In fact, many high-net worth investors have recently redirected funds into the VC community as a relative safe haven versus the unidirectional rollercoaster ride the stock market has represented of late.
As expected, the biggest difference today is that the investments are under greater scrutiny. Yet, when you read the more recent headlines, it initially appears that the majority of funding is going toward Web 2.0 companies or cloud-centric businesses. However, after careful examination, you'll see that the types of companies that are getting funding today share four common attributes, regardless of their category.
So, if your company is not Web 2.0, cloud-centric or otherwise deemed hip and cool, there is still funding available, provided you meet the following four criteria:
1. Intellectual property
While great ideas abound, validating the authenticity of your intellectual property and articulating it in business terms is crucial. One of the primary thoughts going through a VC's mind during a presentation is whether there's enough there, and if the team can actually make it work.
The one simple question that needs to be answered is, "Am I building a product or service for a market that is currently underserved and undervalued, yet will be in demand within the next three to five years?"
2. Market segmentation
While everybody likes to be seen at a crowded party, when it comes to getting funding, it's important that your business is in a market that's not too fragmented, as that leads to higher sales, general and administrative (SG&A) costs and a deflated overall value.
For example, consider the amount of social networks that have sprung up of late, with three dominant players still owning a lion's share of the market, leaving little room for newer entrants. The key is to offer a differentiated, yet complementary product or service that can easily fit into a larger portfolio, while addressing a critical business need.
3. Strength of the team
The experience of the team is becoming increasingly more important when it comes to funding. While a wunderkind makes for great headlines, a company with the greatest potential has a balanced team that includes seasoned veterans with experience in larger technology companies as well as startups.
4. Strength of the business model
While great ideas, differentiated products and experienced teams can lead to funding, the fourth and final element that can make or break a company is its business model. Essentially, before a company can be funded, VCs want to know if the founders have a well-thought-out, realistic and predictable way to forecast revenue, as well as a way to build and execute a strategy around it.
With this in mind, consider whether revenue will be generated on a subscription or maintenance basis, for example, or if it will require a six to nine-month sales cycle. As any enterprise software sales rep can tell you, it's far easier to make quota when you have a recurring revenue stream from an existing client base, as opposed to elephant hunting at the end of the quarter.
Additionally, be clear about your exit strategy. Since initial public offerings (IPOs) are fewer and farther between, especially in the tech sector, VCs need to know how and approximately when their investments will pay off in terms of a liquidity event.