While venture capital gets a lot of attention in the media, it's not necessarily the best financing strategy for every growing business.

Here's what you need to know to determine if venture capital is right for you.

What are your goals?

Venture capitalists (VCs) invest in businesses they think have the potential to get very big, very fast. They aren’t looking for someone who wants to grow his restaurant from one location to three in the local area. They’re looking for someone who wants to grow his restaurant into the next Starbucks.

VCs invest in companies with high growth potential because they want to see big returns. In most cases, VCs expect to “exit” the business in three to 10 years; the exit strategy is for your business to be acquired by a larger company, or to go public and sell shares on the stock market.

Is your product or service unique?

Companies that get VC are often “disruptors” in their industries (think Uber, Zillow, Square or Facebook). A business that’s similar to many others is unlikely to attract VC interest. You have a better chance of success if:

  • You have a proprietary technology that no one else has
  • Your product or service is difficult to replicate
  • You serve a unique niche large enough to be of interest to VCs
  • You have a unique business model
  • Barriers to entry prevent competitors from challenging you

How much money do you need?

Venture capitalists don't deal with small amounts of financing; if you’re seeking $1 million or less, try angel investors instead. VCs typically invest $2 million to $15 million or more.

What stage is your business in?

As a growing company, you're already beyond the initial or “seed” stage of venture capital, so you'll need Series A or Series B financing. Series A is for businesses that have a track record and are prepared to scale, but need financing to hire additional employees, fine-tune the product or service and get new customers. Series B is for thriving companies that want to rapidly expand into new products, new services or new markets.

Are you ready to give up some control of your business?

Venture capital comes with a cost: You’re giving up equity in your business, and while the VCs will be minority owners, you’ll need to answer to them from now on. They may want to sit on your board of directors or take management roles in the business. They can veto your plans or even replace you as CEO. If the mere idea makes you nervous, VC probably isn’t right for you.

Do you have a plan?

VCs will have a lot of control in your business, but they won’t lead you by the hand. You must have a well-thought-out business growth plan that you’re ready to put into action as soon as you get their injection of capital. This business plan can’t be based on hype or speculation—VCs will see right through that. Provide backup for all assertions in your plan and expect them to grill you with questions about your numbers, key metrics and assumptions. Your business plan should also detail exactly how you plan to use the capital they invest and what the results will be (growth of customer base, revenues, etc.).

Do you have a strong team?

The skill, experience and reputation of your management team are critical considerations for VCs. They want to be sure your team can provide leadership despite the challenges of rapid growth. If you lack some key players, you have weak links or your team constantly disagrees, get your house in order before approaching any venture capital company. If you need the VC investment to bolster your management team, indicate that in your business plan.

Obtaining VC takes time, effort and energy, so before you take the plunge, make sure it’s the right step for your business.

venture capital