Do VCs Fund Real Estate Deals?

Time-saving tips on targeting VCs for funding success

Q.  Our company arranges boat and mortgage financing for our clients. We've been in business for 25 years. Recently we were approached by a client to help him find venture financing for a startup condominium development project. I have a list of "The 100 Top Venture Capital Firms." Should I send an executive summary to these funds? What's the easiest way to find funding for my client?

A.  25 years! That's impressive. I bet if you thought for a moment about your secrets of success, good time management might be high on your list.

Everyone always says raising money takes time. But it also takes common sense.

Approaching large funds seems reasonable on the surface. But in terms of results, sending an executive summary for real estate deals to a hundred or more mega venture funds is like going to a butcher to buy bananas. You'll walk away hungry until you target with a little more precision.

Here's what I mean. Accel Partners and 3i are two top funds. 3i invests in technology-oriented businesses and specifically avoids construction, real estate, leasing, education, hotels and leisure industry deals. Accel invests in hardware, software, optics, semiconductors and communications companies but generally stays away from construction, real estate, retailing, food, natural resources and leasing deals.

You can save time by matching your client's industry and stage of development to a venture fund's investment criteria. And just as you won't likely convince the butcher to start selling bananas, venture funds rarely if ever make exceptions to their investment focus.

Of your Top 100 list, I would guess less than five funds include startup real estate in their investment criteria. And it wouldn't surprise me if the real number was zero.

So what is wrong with real estate? While there is money to be made in real estate, the Top 100 venture funds typically look for companies that can sell products or services to large, growing international markets. Investing in a single condo deal is too narrow to provide meaningful upside for a top venture fund.

Another reason why traditional ventures funds avoid real estate is their own investors' criteria. Venture funds get their money from state and private pension funds, university endowments and other large financial institutions. When institutions want to invest in real estate, they typically turn to Real Estate Investment Trusts ("REITs") as well as other corporate real estate development firms, not venture funds with growth company investment expertise.

Here are a few more tips for targeting:

• Top 100 funds usually don't fund start ups because they need to deploy larger amounts of money per transaction. As such, Top 100 funds are generally looking for more established companies that need over $5 million.
• Send your deal to the partner who specializes in your business area. Otherwise your proposal might be too readily dismissed.
• Large funds with high name recognition draw hundreds of new business plans each month. Improve your odds by turning to smaller funds with a regional investment scope.

My recommendation is for you to be a sleuth. Act like Sherlock Holmes and seek out angels and corporate investors that have an appetite for real estate development. Ask local real estate lawyers, real estate bankers, and commercial construction owners for referrals. Pay attention to other condo deals noting their sources of financial backing. As you network, build your own database of investors by industries of investment interest. This database will make it easier to manage future client requests for fundraising assistance.

Again, congratulations for 25 years of client devotion.

Take Command Action Step

If you do help raise money for the condo developer, make sure your company has the right credentials in place before you start the work. The National Association of Security Dealer's has specific rules for qualifying financial service broker activities. Also make sure your state doesn't have some special licensing requirements as well. You can do it!

Do you need time-saving tips to help fund and grow your business? Ask Susan How! Write to small business funding expert Susan Schreter at susan@takecommand.org