Are You Sexy Enough to Attract Venture Capital?

This article was written by Dwayne Moyers and Crystal Detamore-Rodman of Entrepreneur.com and has been excerpted from Financing Your Small Business, available at SmallBizBooks.com

Does your business qualify for institutional venture capital? Run through this diagnostic test developed through an interview with John Martinson. He's the managing partner of the Edison Venture Fund, a Lawrenceville, N.J., venture capital firm with $420 million under its management.

1. Are you a technology company? Technology is the stuff of gods for venture capitalists. With proprietary technology, a company can dominate a market and protect its profit margins. Institutional venture outfits do invest in low- or no-tech deals, just not as often. This means that competition among nontechnology companies is keener than among technology companies.

2. Can you be a market leader? Martinson says institutional venture capital firms are hesitant to throw money at a company that is going up against a market leader with a me-too product or service. It's too difficult and too unlikely to succeed simply by stealing market share from the leader.

There are exceptions, however. In particular, this is where technology can play a role by shattering the existing paradigm of how a product or service is offered, as well as by providing entree for an upstart.

3. Will it be cheap to make this company? Of course, what's expensive to one is cheap to another. But in most venture capitalists' terms, cheap is a company that can be put together and that can establish significant profitability on $10 million to $15 million.

According to Martinson, this preference stems from the fact that most institutional venture capitalists do not want to rely on other sources of capital to make the venture work. Rather, they want to be able to help the company reach a profitable plateau with the funds they are able to commit to the deal.

4. Is there a clear distribution channel? Entrepreneurs often come up with great products and services but no clear or easy way to sell them, Martinson says. It's important to ask whether the distribution channel can be accessed fairly inexpensively.