Back to Contents of Issue: January 2000

Finding the right VC

by Tom Spargo

In my last column (JI, Nov. 1999), I talked about what venture capitalists (VCs) look for in new ventures and how competitive it can be to secure VC, although one point I neglected to make is that some ventures actually have VCs competing to invest. If a U.S. or Japanese venture is fortunate enough to be in that position, it must face the task of evaluating the VC. All entrepreneurs should assemble a list of criteria for a VC that, when satisfied, equate to value beyond the money invested. Here are the most common criteria I have seen, based on discussions with other entrepreneurs.

Experience: By far the most important thing to look at is the extent to which the VC has experience with your venture's industry, technology, and stage of development. The more experienced the VC firm, the greater its ability to assist your venture in executing major strategic initiatives. For example, a seed stage Internet content venture should look at VCs that do early stage investing and have other Internet companies in their portfolio.

Connections: Does the VC have a network of contacts in your industry? Can they help you line up the right strategic partners and directors for your Board? Having the right names involved in your company can dramatically increase your valuation.

Team: VCs often have staff and an in-house guru that are available to assist your venture in its operations. The VC team should be evaluated for expertise, track record, and level of availability.

Reputation: Funding by a top-tier VC such as Kleiner Perkins or Benchmark serves as a signal to the market that your business model is solid. A top VC presence can increase your valuation and ensure a successful IPO.

Chemistry: The VC should be viewed as a potential part of your management team. Entre-preneurs must ask themselves: "Is this someone I want to work with?"

Location: It sounds obvious, but many ventures overlook the importance of being located close to their VC. Working with a VC in another city means discussions by conference call and e-mail instead of in person.

Resources: VCs are now competing with each other by offering additional resources to their portfolio companies. Some VCs provide incubation facilities as an added value. A good example is Bill Gross's Idealab in Southern California, which produced GeoCities and other success stories. Market research, tax, and legal counsel-as well as information databases-are some other resources VCs can provide.

For Japanese entrepreneurs, there are some additional criteria to consider based on the unique nature of business in Japan. One critical factor for success in the Japanese marketplace is distribution. Japan still has many layers in the distribution chain, and if your product involves physical distribution, it is important to have access to an existing network. Trading company and keiretsu-originated VCs such as Mitsui and Sumitomo are examples of Japanese VCs with strong distributor networks. Another important consideration is branding. Japanese businesses and consumers place a high value on traditional brands, and your venture has a greater chance of success if it is associated with a VC from a big name Japanese corporation.

However, the Japanese entrepreneur need not rely on Japanese VCs to get funded. The venture expertise and know-how that U.S. VCs deliver is attracting Japanese entrepreneurs in increasing numbers. Some U.S. VCs such as Sequoia and J.H. Whitney have set up shop in Tokyo to service this demand. Here in Silicon Valley, Japanese entrepreneur tours are now a common sight at Sand Hill Road. JETRO is supporting this development by creating an entrepreneur resource center in Palo Alto designed to host Japanese interested in U.S. VC and Silicon Valley alliances. Many new firms are emerging to service this trend. One example is Venture Access led by Shigeya Ando who is building a Japanese-language database of U.S. VCs and their profiles. I have heard that there are even incubators being developed specifically for Japanese interested in being funded and in establishing a physical presence here.

Some in Japan criticize the Japanese VC industry for its inability to foster Japanese startups. As an entrepreneur with an interest in Japan, it is comforting to know that Japanese entrepreneurs are not waiting for things to change. But regardless of whether you look for VC in the U.S. or in Japan, always make sure to choose carefully.

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