Strategy

3 things to know … about venture capital

RISKS ARE HIGH: Companies spawned by venture capital contribute significantly to the economy. According to Canada’s Venture Capital & Private Equity Association, there were 1,755 such outfits operating in this country last year. In 2007, they generated a combined revenue of $18.5 billion (an average of $10.5 million each), and they were also responsible for generating, directly and indirectly, about 150,000 jobs (1.3% of all private-sector employees) and nearly 1% of the national GDP. But there are plenty of Bid.coms. Between 1996 and 2007, VCs financed 2,175 technology companies in Canada. And at least 20% of them have gone bust.

MONEY IS TIGHT: VC activity outside the United States has dropped to the lowest level since the tech-bubble fallout in 2003. In the second quarter, US$1.5 billion went to 250 non-U.S. deals, down 27% from Q1 and off 63% from the same period last year, according to a recent study by Dow Jones VentureSource. In the U.S., second-quarter VC investment (595 deals) increased from Q1 to US$5.3 billion, but it was still down from 2008. “We’re seeing a clear trend indicating more later-round deals as venture investors work to sustain their current portfolio,” said VentureSource study director Jessica Canning.

SELL YOUIRSELF: Venture capitalists pick a handful of deals out of thousands of pitches. If you get a meeting, David Rose, chairman of investment group New York Angels, says you will get less than 30 minutes to state your case. And if you push just your business plan, you will likely leave empty-handed. VCs bet on people, so explain what you offer the market — but sell yourself as a leader who can deliver ROI. Whatever you do, David Pakman, a New York–based VC blogger, says don’t talk about contracts that are just days away from being inked. That will just make potential backers wonder why you didn’t sign them before seeking new funds.