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Venture Capitalists Love Tech -- Here's How to Compete

Learn what investors want in technology companies.

Whether you're a software start-up that sells to Fortune 500 companies or a Web 2.0 business, chances are you're raising eyebrows.

Technology companies of all kinds are attracting willing investors, but the darlings of this trend are Internet-related companies.

Propelled by the success of Facebook and



, this sector is soaking up 2/3 of all technology dollars, says Tracy Lefteroff, global managing partner of the venture capital practice of PricewaterhouseCoopers.

Who Does VC Want Now?

Web 2.0 companies are hot investments because they don't take much capital to build, rely on user-generated content and are scalable, says Sarah Tavel, an analyst with New York-based venture capital firm,

Bessemer Venture Partners.

BVP invested in

Wikia, an early-stage company that hosts wiki communities.

Companies peripherally related to the Internet, such as

Wayport, which provides Internet access in hotels, have also attracted dollars.

Lastly, clean technologies, such as companies that provide alternative fuel, take up to 10% of venture capital money, says Lefteroff.

Who Will VC Want?

Companies that focus on data transmission and the ability to communicate will be next to attract investor attention, says Kirby Cochran, head of Castle Arch Capital.

"The difficult part of telecommunications has always been to allow for large bandwidths of information in broadcast quality," explains Cochran.

Companies that can increase the quality of video transition or converge cable, satellite and Internet will draw dollars because of their growth potential, he says.

Cochran invests in

Broadcast Technology, which allows for video transmission of content in real time. The company has grown significantly and recently signed a two-year agreement with




Will VC Want Me?

No matter what's hot at the moment, the tech company that maintains a comprehensive revenue model and a solid management team will appeal most to investors, says Cochran.

"I bet on the jockey not the horse," he says of his investment choices, 95% of which are based on the company's management.

Investors also want proof that the management team invested their own money in the company -- this way management has more to lose if the company fails.

Art Chang, CEO of

Tipping Point Partners, looks for companies that have garnered interest from family members. This shows the entrepreneur has a more personal commitment to the company, he says.

When dealing with sophisticated investors, always know the net present value of your customer, says Cochran. "Most entrepreneurs will never think about

their customers in those terms but the astute investor always will," he explains.