Where will your business be located? This decision is one that must be made carefully. The geography of your business headquarters, as well as the state of the legal business entity’s registration, may make the difference in whether your company will receive VC funding.
Many VC firms have specific guidelines and policies that not only determine in whom they invest, but also where they want to invest money. And it may have nothing to do with your business idea. A quality business that fits VC guidelines, but not the geography, may not be chosen as a funding option. Therefore, you should always know in advance whether a VC firm has specific geographical guidelines.
Why is location so important? Below are some of the typical reasons VC’s have geographical limitations.
The Cluster Effect
Why is it that most software or technology companies are located in the Silicon Valley in California? Since the late 1990s, tech firms have clustered around the Silicon Valley area. Giants like Apple and Google are headquartered there. Some say that the locale provides the best talent, and thus, tech firms have the best chance to succeed in that area. A VC firm may determine that if they invest in tech or software business, it will be only in the northern California area.
A Balanced Investor Portfolio
Venture capital firms also have investors to whom they must answer. Investors that contribute money to a venture capital firm want security in knowing that not all their proverbial eggs are in one basket. Subsequently, a VC firm will balance a portfolio over a geographical range. If one region of the country hits on hard economic times, other businesses in different areas will pull the slack from disappointing results elsewhere.
State Laws and Regulations
Have you ever wondered why so many financial and credit companies are located in Delaware? The corporation laws of that state are the most relaxed in the country, and they allow financial firms much flexibility in managing corporate policies and interest rates. Since interest rate limits that a company may charge are based on the legal state entity status, many financial companies choose Delaware in order to charge higher rates.
The state you chose to register your business can be a key decision. Like the example above, a financial firm will have greater options if they become a Delaware corporation. You should determine how your business operations will best succeed in a perfect world of little regulation. If you discover that the state you currently reside in does not offer the flexibility you require for your business, consider registering it in another state.
Venture capital firms can be picky about what businesses they chose to invest in and in what states they operate. Usually a VC firm will know the best regions for a particular business. Take a look at your potential set of venture capital firms and research each one to know what regions they prefer and by what type of business. Your state headquarters could make the difference in obtaining much needed venture capital funds.