This week yours truly conducted an informal and nonscientific survey of institutional venture capitalists in the South to try to get the real story on their investing sweet spots. My goal was to get some color on where the action is, as opposed to what you might read on their websites. I also promised not to give individual attribution but to aggregate the data. If an early goal of an entrepreneur in this region is to raise money, it’s a good thing to understand for what purposes money is available. Just like creating a product around customer need, creating a business that requires capital around investors’ known interests will improve the odds of success. I asked three questions of 15 firms in seven states:

1. What are the top 2-3 categories of companies that would most likely capture your attention right now?
2. If a deal in one of those categories walked in the door, how big would it have to be in terms of total raise?
3. What stage of company and product development meets your hurdle?

First, don't take underestimate the fact investors are foremost looking for good management teams, well-defined plans in big markets, hockey sticks, and all the other basics. As an example, Tripp Rackley at the May 12 MIT Enterprise Forum described how this very process ultimately became the very successful Firethorn. Like Tripp, if you’re going to ponder where to spend a few years of your business life, you might want to think about areas that have big potential for yourself and for your investors. So, let’s look at some of the areas that VCs seem to believe have potential:

Energy/Green

• Software to provide visibility into energy consumption & spend
• Smart grid and battery technologies, e.g. plug stations and batteries for autos to contribute peak power to grid
• Energy storage
• Tidal systems

Information Technology (IT)

• “Mundane” IT products with some proprietary component
• SaaS companies serving SMB’s, information security, and mobile applications
• Information security software
• Datacenter technologies
• Multiservice Environments
• Wireless backhaul networks
• Off-grid network services
• Data services for RFID

Industrial

• Green buildings
• Supply Chain
• Security & Integrity of Supply
• Transportation

Finance

• Software solutions related to the audit of governance, risk and compliance
• Data integrity industries

Healthcare

• Healthcare IT
• Medical devices, particularly multi-application
• Healthcare services, non-hospital for savings, e.g. rehab, hospice, home health

Business Services

• Services with a tech/proprietary component
• Specialty e-commerce
• Internet lead generation
• Internet marketing services

Of note, one firm believes that Green Tech and Medical Device plays take too much money to achieve good returns for early investors. There were also cautionary notes about Healthcare IT in that it’s a crowded space, hard to pick the winners, and now all about cost reduction and therefore means heavy price competition.

We have 25 areas of interest from just a handful of VCs (and one on Material Sciences I'm still trying to chase down). Some are big-capital, big-think concepts, and others are more in the oft-plowed fields of local expertise where we have established clusters. Although SaaS and Healthcare IT were mentioned a couple of times, there was no significant common thread in this sample. At least they’re not all piling on a single industry like Social Media bandwagon and diluting each other’s potential.

We had three mentions of Mobile & Digital Media as hot areas, but no one showed any interest in investing in them! Those future fortunes are by-and-large going to be funded outside the South. Several of the concepts put forth are good fits with technology originating from our research universities and might well be the foundation for new clusters.

As to the total raise expected, here’s the raw data more or less in descending order:

Deal Size

1. $8-10M
2. $6-15M
3. $5-15M
4. $5M
5. $2-7M
6. $1-5M
7. $1-5M but possibly less
8. $25K-$2M

You can see that we have one outlier that will do smaller deals and might more properly be categorized as a super angel (it’s not Sig). We had others mention they'd consider dipping down to the $500K range for an all-star management team with a very capital efficient plan. VCs across the country are paying attention to smaller deals because so much more can be done with currently available technology tools than what we grew accustomed to in the past. If they allow these deals get to a bigger second round, too much of the potential investor gain has passed. There’s also a feeling of wanting to stay in the lead in deals, meaning that funds need to invest in projects where they can stay in control of subsequent rounds and valuations. The goal is not to become a victim of cramdowns. You can infer from the data above that some in our sample have much deeper pockets than others, but I’d bet all are like-minded with respect to maintaining valuation control.

Now on to the third question: How far along do you have to be to get an audience? Our friendly outlier at the end of the list will evaluate your napkin, but everyone else is looking at something north of $1M in revenue (usually well north) and mostly recurring and very predictable. Venture doesn’t mean “adventure” in these cases; they look more like private equity deals that can qualify for some element of debt along with an equity raise. Here’s the raw data in descending order:

TTM Revenues

1. $5-25M
2. $5M
3. $4-5M (recurring, B/E)
4. $2-25M
5. $2M
6. $2M
7. $1M+ (recurring, scalable)
8. Napkin/beta/sales traction

The one rule to remember is that there is always an exception to these rules. You might have conceived the next Snuggie and be able to get $500K from one of the heavy-duty data center funds. Not likely, but as mentioned before, everything hinges on the investor’s confidence in the management team. I have talked before about converting our regional startup culture into more of a finish-up mindset, and hopefully the information here will give you some hints as to where those opportunities lie.