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Tips from a VC: Identifying Small Business Investment Objectives (part 2)

It takes a lot to become a successful small business entrepreneur. That great idea is just the beginning. You need a plan. You need a reliable team. You may need financing beyond what family and friends and your own hard work can provide. We were lucky enough to get some face time with Bob Davis, who founded and was CEO of Lycos and is now a leading venture capitalist with Highland Capital Partners. From his office in Cambridge, Mass., Davis tackled five major areas of small business investment.

In part two, we'll take a look at the kinds of objectives you need to consider when approaching investment opportunities for your small business.

You can follow Bob on Twitter on @BobDavisHCP or learn more about him at www.hcp.com

Staples: Are there specific objectives or traits a business should look for when researching VC funding?

BD:  It’s an interesting question. You don’t necessarily need a venture capitalist that is learning on the job with you. You generally would want someone that has the experience to understand what you’re building and how you are going to go about it. If an entrepreneur was starting a healthcare company, for medical devices, for example, I would tell the entrepreneur that my firm is not the match [since that is not our specialty].

Second of all, take a look at your personal assets and ask, “Do I want to finance this myself?” Look at potential outside sources of financing:

  • Friends and family
  • Previously successful angel investors, which means someone who has a little extra cash around and is interested in contributing to a business without requiring a significant amount of ownership
  • Structured seed funds, of which there are many, that invest in very early companies, generally with smaller amounts. These investments are generally anywhere from $50,000 to $500,000
  • Incubators that provide a small amount of capital, but even more importantly, provide extensive mentoring and guidance.  Essentially, you go to school for a three to five month period and  have a team of people helping you learn how to build your business.
  • Venture funds, which typically invest in Series A and beyond. In addition to capital, a venture fund typically holds a board seat and works with the entrepreneur at every stage of company building.  Some venture funds will invest very early as an idea is being germinated while others look for some level of momentum underneath the business before an investment is made.

Staples: Is there a situation or a stage of a company’s growth where it doesn’t makes sense to start investigating VC?

BD: For the most part VC is when you need a substantial amount to accelerate the growth of the business and you’re looking for an active investor, an active board member, and more importantly a partner for the growth of the company. Entrepreneurs should also note that, while it's not an absolute rule, most VCs are looking for a minimum of 20% ownership at the time they invest in a company.

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