Institutional Venture Capital VC funding isn't always easy to obtain and and you'll have to give up equity, but when you're a high-growth company with high-financing needs, it can be your best bet.

Definition or Explanation: This type of funding includes venture capital from professionally managed funds that have between $25 million and $1 billion to invest in emerging growth companies.

Appropriate For: High-growth companies that are capable of reaching at least $25 million in sales in five years.

Supply: Limited. According to recent surveys from the National Venture Capital Association, U.S. venture capital firms annually invest between $5 billion and $10 billion. Many of these investment dollars go to companies already in the institutional venture capitalist's portfolio.

Best Use: Varied. May be used for everything from financing product development to expansion of a proven and profitable product or service.

Cost: Expensive. Institutional venture capitalists demand significant equity in a business. The earlier the investment stage, the more equity is required to convince an institutional venture capitalist to invest.

Ease of Acquisition: Difficult. Institutional venture capitalists are choosy. Compounding the degree of difficulty is the fact that institutional venture capital is an appropriate source of funding for a limited number of companies.

Range of Funds Typically Available: $500,000 to $10 million.

First Steps
Using a shotgun approach means you send your business plan or some derivative thereof to as many venture capitalists as possible and hope that the numbers alone will strike one that has been looking for a deal such as yours.

The shotgun approach has its proponents and its critics. For instance, Gordon Baty, a partner with Cambridge, Massachusetts-based venture outfit Zero Stage Capital, says, "Of every 100 plans that we get, 90 are completely irrelevant because they do not match our investment criteria regarding the industry, stage of development, geographic location, or the amount of capital we typically invest." Of this misguided bunch, Baty says, "our receptionist can weed out their business plans."

Fair comment. But the shotgun approach has one significant advantage over the rifle method. The latter relies on intensive research that is based on a venture fund's past investment patterns. What your research will fail to turn up is all the available venture capital funds that have now decided to focus their energies on restaurant deals, business service companies, publishing companies or Internet-content businesses.

In many cases, your mail will be well off the mark, and your letter will be weeded out by the receptionist-or the college intern sorting the mail. For instance, some venture capital firms might specialize in wireless communications companies from the so-called first stage on, while your company, which makes disposable medical devices, is in the development stage.

A more reasonable approach might be to take at least one pass through your institutional venture capital sources and weed out the obvious misses for your particular line of business. Even a quick screen prevents many obvious misses. Of course, such an effort, while seemingly logical, undermines one of the chief benefits of the shotgun approach to begin with. That is, it lets you reach investors who may have changed their historical investment criteria and are now looking for companies like yours.

If you can mail your letter, business plan summary and business reply card for 50 cents each, it's worth going after the 1,200 to 1,800 traditional sources of institutional venture capital.

The rifle approach, which favors limiting your search to 15 to 20 well-researched targets, is the one favored by most attorneys, accountants, consultants and other assorted experts. Venture capitalists seem to favor it because a highly targeted approach by entrepreneurs replaces an abundance of irrelevant opportunities with a manageable number of interesting ones.

The rifle approach is simple but time consuming. Basically, you search by five variables and then rank your candidates by how well they meet these criteria. The five key search variables are:

• Searching by line of business: Most venture capitalists specialize in one or more industries. It's the focus on a particular technology, industry or business that supposedly lets them pick winners in their formative stages. This specialization is good news because it allows you to easily identify venture capitalists who should be interested and those who probably won't be.
• Searching by geographic preference: The very hands-on approach of institutional venture capital investing makes distance a factor. That is, to be a board member, and perhaps be intimately involved in a company's development, a venture capitalist would find it difficult to invest in companies that are 2,000 or 3,000 miles away. Many do, mind you. But more venture capitalists stick to well-defined geographic regions such as the mid-Atlantic region, the Northwest, the Southeast or a particular state. Search your source material and weed out venture capital investors who do not look at deals in your area.
• Searching by stage of development: In the same way that venture capital investors specialize in one industry or another, they also specialize in different stages of development. That is, some companies invest in early-stage companies, while others invest in more mature companies. This intuitively make sense. After all, from a venture capitalist's standpoint, a company that is trying to make a better mousetrap requires much different care and feeding than one that has already figured this out and is on the brink of national distribution.
• Searching by leadership status: In the world of venture capital investing there are leaders and there are followers. The leaders, also known as "lead" firms, are those that have recognized expertise and who conduct extensive due diligence on their prospective portfolio companies. The followers, known as "follow-on" investors, are more passive. They simply invest alongside the lead firms. Lead firms can be helpful when you are trying to raise your second, third or fourth round of venture capital because their presence alone can attract other investors for these later rounds. They are no help when you are trying to raise your first round of venture capital, however. Review your source material and weed out the firms that do not act as the lead investors in deals.
• Searching by deal size: Institutional venture capitalists generally place upper and lower limits on the sizes of their investments. These limits are closely related to the overall size of the fund the venture capitalist is managing. VCs with $250 million to invest typically don't want to look at your $500,000 deal. Why? Because to invest the entire fund in $500,000 increments means the firm would have to invest in 1,000 deals. Consider this number in the context of venture capitalist John Martinson's experience. Specifically, Martinson looks at 2,000 business plans each year to invest in an average of 10 companies. To do 1,000 deals, he would have to look at 200,000 business plans.

If you follow the above methodology, your list of prospective venture capitalists should be short-perhaps 15 or fewer.