Venture Capital: Key Limitations in the Selection Process

The venture capital industry moves lots of money. The average size of a venture capital fund is around $150 million. If you think raising money for your company is hard, imagine how hard raising $150 million with no business idea at all would be! The average size of a VC investment into a company is around $8 million, but some investments are much smaller, and some are much larger. Overall about $20 billion is invested by VCs every year.

Understand the venture capitalist's role

You may feel that it is your job as CEO to understand your company, industry, and business like the back of your hand. That’s true, but when you are raising capital through VCs, you are expected to understand the VC world, too. If you plan to do business with a VC, then you need to know how venture capital investments work so that you can be an equal partner in the relationship.

VCs are tied to their limited partnership agreements, and they have certain investing parameters that they must adhere to. One of the key limitations has to do with what kind of company the fund can invest in. Another is how long the investment period is.

Go for an industry match

VCs get hundreds of applications or pitch decks sent to them every year. Any company that doesn’t fit the types of ventures defined in the contracts between the VC and her limited partners is going right in the trash.

The reason is that VCs are not legally allowed to fund companies in a different industry than the one specified in the limited partnership agreement. Doing so breaks the contract that the VC has with her limited partners. Bottom line: Some VCs can’t invest in your company even if they wanted to.

As an example, a company that makes equipment for microbreweries once asked Peter for some advice: It seems that this company had been rejected by a VC known for investing in software companies. The company founder asked whether he should get in contact with that VC again, now that the economy was improving.

Peter’s answer? No! That VC cannot invest in microbrewery equipment; because of his agreement with his limited partners, he was only able to invest in software companies.

Limit the amount of time that money can stay invested

A VC is limited in the amount of time that her money can stay invested in your company. She signed an agreement with her limited partners that the fund would liquidate in fewer than ten years. She’s banking on the fact that your company can grow fast and get acquired (or go public) before she has to give the money back to her limited partners.

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