While angel investors prefer to invest in start-ups for an equity stake in the business, venture capitalists invest in semi-middle stage, high risk and high potential start-up companies that are involved specifically in high technology industries such as biotechnology, software development and IT (Information Technology).
Approaching them is no different from angel investors. You will need to have prepared your business plan, written your executive summary and researched potential venture capitalists.
However, venture capitalists put more emphasis on a credible managing team than the actual product. They would much rather invest in a bad idea led by a team of established and successful managers than a great idea led by a team of inexperienced individuals.
With that said, if your team is experienced and your product is investment-worthy, you will be on the right track in getting investment dollars.
Keep in mind that unlike angel investors who generally invest small amounts up to $50,000, venture capitalists prefer to invest a minimum of $3 million or more and would expect a seat on the board of directors. If you do not have one, they may ask for one to be formed. Similarly if your team lacks experienced managers, you must be opened to outside hires.
Your product must be a solution to a problem and possess enough competitive edge for it to be marketable and profitable. Venture capitalists have a very specific and thorough evaluation process they will put entrepreneurs through before they part with their cash.
Therefore, it is critical for the business plan to be tailored specially for the venture capitalist if you are approaching other types of investors as well.
If your product is something new to the market/industry, venture capitalists will expect you to start generating sales before competitors enter the mix and reduce overall profitability.
The size of the market is especially important to venture capitalists since they will want to invest in companies that have the potential to generate sales in the hundreds of thousands of dollars.
Thus, the size of your market will either attract them or put them off.
Venture capitalists are much stricter and demanding than angel investors and with good reason.
When they decide yours is a business they are interested in, they will invest big and expect even bigger returns.