There are many kinds of venture capitalists who invest in different types of opportunities. Some venture capitalists prefer to provide only seed capital; others prefer investing in mature companies looking for expansion capital. Some venture capitalists might only invest in specific industries and locales.
Here's a quick primer on those factors that might influence a venture capital firm's funding decision. Finding out what a specific venture capital firm is looking for can help narrow your capital search and put your business plan in front of the most appropriate investors.
Industry: Many venture capitalists specialize in a narrow set of industries. Some specialize in semiconductors, others in health care devices, biotech, or Internet services. Still others invest in "low-tech" businesses. Determining what industries a venture capital firm invests in will disclose whether or not it will consider funding your venture and show you where it has placed its bets in the past.
Geography: Just because some venture capitalists are located in Silicon Valley doesn't mean they only invest in Silicon Valley companies. Some venture capital firms like to invest only in companies that are located near them, while others have a national or global scope.
Stage of development: While some firms like to invest early in the infancy of a start-up, others prefer to invest in later stages of development. Here are some key stages of development that venture capital firms consider:
Early Stage Financing Seed financing is the initial investment required to prove a concept (e.g., to build a prototype or conduct market research) and qualify for start-up financing.
Start-up financing is what is typically required to build a management team and bring a product (or service) to market.
First-stage financing is often sought when start-up financing is depleted and a young company needs to expand its production, marketing, and/or sales capabilities to "ramp up."
Expansion Financing Second-stage financing is used by companies that are shipping products (or delivering services) and growing but need additional sources of funds to fund working capital requirements and grow faster than internally generated cash flow will allow.
Mezzanine financing is typically used to fund substantial growth and/or expansion of companies that are already up and running and are often at or beyond break-even volumes. Capital to fund a plant expansion or to move into a new geographic market is often categorized into this class of funding.
Bridge financing is sometimes needed when a company is about to go public within the following year. Bridge financing, as the name implies, is used to get the company to the IPO. Usually, the bridge financing is short term and is paid off with proceeds from the public offering.
Acquisitions/Buyouts This type of financing is used to fund the acquisitions or buyouts of existing businesses that are up and running. Many times these are mature businesses that are funded with a large component of debt and a small level of equity capital (leveraged buyouts). The K.K.R. acquisition of RJR/Nabisco was one of the more famous (and largest) examples of this type of transaction.