As we begin 2009, many companies are again considering whether or not to begin or restart the fundraising process.  For some technology or life sciences companies, raising venture capital is an important and necessary step in their company’s life cycle.  But, before any company invests the time, energy and effort required to raise venture capital funding, ask yourself the important question…

Is our company a good fit for venture capital?

The harsh reality is, many business plans received by venture capital firms will be immediately rejected because the company is not a good “fit” for that venture fund or for venture capital financing in general. This could mean the company is serving a market that is too small or is a niche market. It could be that the technology has few barriers to entry. Or, it could be a company that will have fairly low gross margins.

But, in many of the cases, it doesn’t mean that the business isn’t a good business.  Rather, it most likely means the business isn’t a good fit for venture capital.

The reasons listed above represent just  a few of the important criteria in the venture capital marketplace.

So how do you know if you are a good fit for venture capital?  At the end of this post is the VC “Fit” Test, a tool I’ve developed that can help companies determine if they are a good fit and should spend the time raising funds now, or should wait for a better point to raise funds.  Use the tool to understand whether your company is ready to focus its fundraising efforts on venture capital.

Take the VC “Fit” Test to see if your company would be a good fit for venture capital investment. Keep in mind that this test is simply to gauge a company’s “fit” with a traditional VC model. Many companies may have a different model that fits the particular investment strategy or focus of certain venture firms. Therefore, this information should only be used as a guide to understand the initial perception you may receive from a traditional venture firm. And remember, these tend to be rules of thumb — many companies break the mold every day, so recognize that you should rely on your advisors, contacts, team members, and experience to determine the true “Fit” of your business for venture capital.

Historically not a Good Fit for Venture Capital…

Many very successful businesses or businesses with the potential for success do not fit the venture capital funding model. For example, a business plan to provide technology consulting services may not be a typical business model funded by venture capitalists.

Here are some examples of markets, products and technologies that tend not to be ‘fits’ for venture capital funding:

· A market such as retail, mining or banking, may not be a market the venture firm will invest in or has contacts in and knowledge of.

· A product or service that is highly technical, extremely complicated and difficult to explain to a lay person, or that the venture capitalist is unable to fully grasp may not be a technology that the venture capitalist is willing to try and convince his or her partners to invest in.

· A technology that will only serve a small niche and will involve an extensive process of education, selling and distribution may not have the risk-reward profile for a venture firm.

· A business designed to sell a low-cost product at a low margin, taking market share from the industry leader may not be a model that a venture firm will find fits its strategy.

In each of the cases above, it is not that the business is not a good idea or will not be a successful business. Instead, it is simply a failure to match the business profile of the company with the investment profile of the venture firm. Perhaps, some of these business concepts will eventually be funded by venture firms after they are established and better fit a firm investing in later-stage companies.

Companies may find that they are not a company that is a good fit for venture funding. In some cases, this will mean that the company’s model and goals do not align with the venture capital funding model. In other cases, a company will recognize that they need to attempt to grow the business, further develop the product or increase the experience level of the management team. In both cases, the company should focus their efforts on growing the business through other funding sources until the business more closely matches the business model funded by venture capital firms.

The VC “Fit” Test*

* This article is an excerpt from my book What Every Engineer Should Know About Starting a High-Tech Business Venture, available now.

Select 1 to 5 for each of the categories below. Total your score below.

1. Size of your Market:

2. Revenues in Five Years:

3. How much Investment do you Require Now?

4. Product Gross Margins:

5. Industry:

6. Location of Company:

7. Management Team Business Experience & Success:

8. Costs to Bring the Product to Market:

(for example, Sales, Marketing, Distribution, Consumer Education, etc.)

9. How extensive are the barriers to entry you have?

(for example, intellectual property, proprietary information, lead to the game)

10. Current commitment to Business

(for example, full-time founders, office space, development products, angel investors)

Bonus Points (1 pt. for each):

• Former CEO
• Received VC Funding at Prior Company
• 1 pt. for every five people you know personally at any venture capital firm

TOTAL: