Attracting Venture Capital in a Tough Market: Five Key Criteria

Rodney Lusk, Capital Attraction Manager, Fairfax County Economic Development Authority, USIBEX AlliancePartner

1.       Strong Management Team

The team must have experience in growing a company and a record of completing a successful exit by either taking a company public or negotiating its merger or sale. This team typically has an outstanding technologist on staff, evidence of talent for developing “demand side” commercial applications and evidence of professional financial controls. Investors are looking for “seasoned” managers that have the ability to execute and successfully grow companies in this radically changed economic environment.      

2.       Evidence of Customer Demand

The company must demonstrate their ability to create a customer-focused product with a well-defined sales plan.  The product must address real pain in the marketplace, making it a “must have” and not a “nice to have”. The sales strategy will include evidence of actual customer demand including: customer contacts, letters of interest, orders, channel relationships/strategic partnerships and revenues.  The sales strategy will be based on current demand statistics and indicate the firm’s understanding of its entire distribution chain. Success is driven by the company’s ability to obtain sales and generate profits.

3.       A Compelling Intellectual Property Story

Companies need to keep their intellectual property story simple and direct.  These companies will have been awarded patents or have applications pending. The firms will have secured international protection, obtained necessary licenses for use of the technology or secured assignments of patents and inventions. The investors will want to have evidence that there are no outstanding questions about the rights that are held by the company as it relates to protecting the firm’s proprietary technology. 

4.       Respect for Competition

Companies need to show respect for the competition. These companies would never say, “there is no real competition.” Instead they must done their homework to develop a comprehensive list of competitors because the “enemy” is always thinking and they want to keep a few steps ahead.   By having a granular knowledge of the nearest competitor the company can develop a competitive product features matrix that shows in a graphical way how their products or services are different from their competitors. This graphic is also an effective way for the investors to understand the key differentiators and establish a rationale for investing in the company.

5.       Articulating the Exit Strategy

Companies need to show that they are as focused as the venture capitalist in ultimately realizing value for the shareholders. They do this by having a realistic path to liquidity within 4 years.  They show alignment of founders/management with investors and they identify who the likely candidates are to sell, merge or have as a strategic buyer.  The IPO market has provided few exit opportunities for technology companies and shows few signs of making a quick rebound. The companies that create value by effectively executing on their business plans will have the greatest opportunity to become public companies once the IPO market comes back. 

            These five characteristics are intended to provide a framework for the areas that are going to be of interest to a venture capital firm when reviewing a business plan and deciding to make an investment. The Fairfax County Economic Development Authority (FCEDA), a Partner of USIBEX, can, through its Venture Capital Attraction Program, assist firms in identifying potential investors and developing a strategy on how to approach these investors.