How can I find a venture capitalist for my business?

Q: I would like an introduction to the right venture capitalist (VC). We are a self-funded SBIR (Small Business Innovation Research) company with two categories of government-funded research contracts. One is for special lasers, which has limited potential, but we have a nice small business going that sells these lasers for research applications; the other area is in the early stage of technology development but could have a huge market if we can make it work.

A: Personally, I believe you are in an enviable situation. I have known you in the industry for more than 30 years and I will speak frankly. My recommendation is to stick to what you do and not seek VC money at this stage. You would need to spend a great deal of effort raising money, and if you get funded, there would be big changes in the way you operate. Investors are likely to make demands on you to speed up the technology development in the second area, whether it is possible or not. We can revisit this question again when you have made concrete advancements in the technology. I am assuming you can continue to get funding for that work to enable you to continue what you do, which is really a lifestyle business.

The reason I come to this conclusion is that VCs are likely to look at your two business areas separately and would not fund the first area because it is not likely to become a big enough business with meaningful liquid­ity value. For all practical purposes, therefore, they would be investing for the big upside and would see everything else as a distraction. My guess is they would ask you to divest the first business so you can focus on the new technology. Venture capitalists view opportunities differently from research funding agencies; they fund some research but only when the risks are quite quantified, not when there are still materials-science issues to address. The thing to keep in mind is that VCs are not venturesome­—they only take calculated risks. The VCs who would invest in research projects are also likely to be the ones who would make unreasonable demands on your work.

Q: Our telecom components company started during the bubble and we feel we need more critical mass to remain a stand-alone company. What are the considerations in joining forces with another company in a similar situation?

A: You can expect to see more consolidation ­to occur in this way because fewer large companies are positioned to acquire embryonic businesses. Conceptually this consolidation is a good strategy, assuming you are not trying to combine two poorly run companies to make one good one—the likely outcome of that would be a bigger mess. You said that one of the business reasons for a merger is to have more critical mass for customers to find reasons to talk to your sales force. You would also reduce overhead costs by consolidating many duplicative functions to achieve greater efficiencies. Good idea aside, many practical problems could make combining companies difficult. Most of the reasons involve having too many people involved. First, determining who should be the executives to run the combined company could be a political nightmare and the deal can easily be sabotaged by the key people. Then, there would be too many investors, and undoubtedly each would have an opinion about how the deal should be structured, what valuation to use to split up the ownership, and what the strategy should be moving forward. Because both are private companies, you would have two moving targets with each company’s owners believing they are worth more. The mechanics of implementation are also difficult. With the combined number of investors, founders, and employees who exercised options, the number of shareholders would require more paperwork to meet SEC (U.S. Securities and Exchange Commission) regulations. If you are serious about this, I recommend you sign with a banker to do some serious prospecting. You need strong champions to drive the transaction to make it work.