You've got an interesting product, demand for it is building, and your friendly banker has bluntly told you that while it's true you need capital, a large loan is out of the question. Time to call in the venture capitalists?

The good news is that, after four down years, the venture-capital industry is again attracting quite healthy levels of new money. (See "A Bounce in Venture Funding," [Article link].) The VCs who've been fortunate enough to raise money are now searching for winning places to put it. However, the cold truth is that for most small companies, getting venture funding is still a long shot. For starters, most businesses don't have a bright enough upside. "Unless you have a clear advantage over competitors," says Robert Mast, a vice-president at Venture Economics in Newark, N.J., "it will be hard to get money."

Different VCs have different specialties, but here are some general themes that seem to characterize the recent market:

Industry segment. Software companies of various kinds have been attracting more money as many of the big venture funds lose their appetite for computer-hardware-related deals. Other growing areas include biotech, pharmaceuticals, and medical equipment. Yet some venture funds, like Chicago's Golder, Thoma & Cressey, prefer taking positions in low-tech services as a way to control risk.

Stage of growth. While the amount of money flowing into early-stage deals has been increasing lately, most investors have developed a strong preference for "expansion" deals as opposed to start-ups. "Once you take out the product-development risk, we feel there's a greater chance of success," says Ray Rafferty Jr., a general partner with Meridian Venture Partners, in Radnor, Pa. Also, later-stage deals often provide opportunities for faster liquidity (within three or four years, versus seven or eight).

Minimum investment. The bigger the fund (the better-known funds have upwards of $100 million), the more cumbersome it is to make small investments; it's easier for a VC to monitor one $3-million deal than three $1-million deals. If your company doesn't need a lot of money, try to find small funds that can invest in small amounts.

Targeted return. If VC funds are well managed, they earn an average of 20% net on their total portfolio of investments; many earn significantly less. (The median over the past five years has been around 9%.) But on individual deals, VCs have to shoot much higher to compensate for the investments that won't pan out. Most say they want to earn a compounded annual rate of return of at least 38% (or five times their money in five years).

Looking for more information on venture capital? In its June 1993 issue, Venture Capital Journal (212-765-5311) has a six-page review of where the money went in 1992. Issue cost: $75. For more detailed analysis, order Venture Finance's Venture Capital Yearbook (212-696-9330). The 200-page report sells for $495.

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