In good times, a venture capital firm might look at 100 deals a year, focus on 10 potential opportunities and then commit to just one. Those are pretty bleak odds if you’re an entrepreneur looking for capital, according to a recent article in the New Hampshire Business Review. But both entrepreneurs and those looking for jobs in venture capital will benefit from understanding why venture capitalists say no to an opportunity.
– Relative Appeal: This means the VC is either too busy working on other deals, or just not excited about your deal. Or it might mean there’s a greater perceived risk for the upside potential than with other investments, and so it’s a pass.
– Fit: Early-stage investors like certain sectors and business models better than others. VC firms are also comprised of partners. If one partner doesn’t like the deal, it can be enough to sink the efforts of the deal’s champion.
– Management: The article points out that the management team in place at the start-up is akin to the value of “location, location, location” in a real estate investment. If the start-ups management lacks the right experience, VCs will head for the door.
Of course, in the current economic crisis, many VC firms are just saying “no” to preserve capital for their current investments and to keep their firm afloat. As we have pointed out in other posts, VC investment has slowed to a crawl, with the lowest number of deals seen in years. The more optimistic industry insiders are hoping for an upturn in late 2009.
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