What do venture capitalists look for in the companies they back?

Bull City Venture Partners Jason Caplain and David Jones prefer entrepreneurs who have been successful before but are still hungry to start a new firm, they said in the Demystifying VC discussion at the Internet Summit in Raleigh on Thursday.

First time entrepreneurs are not without a chance, though, said moderator Matt Williamson, CEO of Windsor Circle and himself a first timer. “You have to show them you know what you’re doing,” he said. It also doesn’t hurt to get validation from winning a Google demo day event, which led former AOL head Steve Case to plop down $100,000 on the spot.

Jones pointed out that Williamson also came to the game “With a Rollodex full of the people he was selling into.” Williamson added that Windsor acquired an advisory board of impressive names and that also helped validate them.

Generally, though, both Caplain and Jones said they prefer an entrepreneur who has done it all before.

Preference: Product, not Services

Bull City (www.bcvp.com) invests from $250,000 to $2 million in early stage software, Internet and technology companies in the Southeast and Mid-Atlantic regions. Companies the VCs have been invovled with include Art.com, Motricity, Channel Advisor, Reverbnation, and Double Positive. Unlike many VC firms, they believe in being easy to reach and their email addresses are available on their Web site and they hold regular breakfasts open to all entrepreneurs.

Jones noted they prefer product, not service companies. If a company does have a service component, they want it to be only 20 to 30 percent of the business and falling rather than rising.

That’s because as a service business grows, it usually has to add to its headcount, while a product company may start with a larger than normal headcount but tends to need fewer people as they succeed.

Asked what they look for in a company, Jones said, “Something operating in a big market, the management team, and “some kind of momentum.” That might be increasing revenue, unique hits or other metrics.

Business Plan a Must?

One surprise, entrepreneurs may be wasting their time writing business plans. “I don’t think we only read one business plan and it was our worst company,” Caplain said. “We prefer to have a conversation with the entrepreneurs,” he added, “rather than sitting like a bump on a log for an hour.”

The VCs advise companies doing the venture dance to create a data site with all their relevant metrics, then check to see which VCs, if any, are actively checking it to get an idea of who is really interested in them.

Jones noted that a West Coast VC said, “I invest in lines, not dots.” Meaning that if every contact between the entrepreneur and the VC is a dot, connecting the dots over time is what matters. “Start those dots as quickly as possible,” Jones said.

Both Caplain and Jones noted that their operating method includes talking to a company’s customers. “We ask them what they like about it,” Jones said.

“On average, we have a relationship with a company for over a year before we invest,” Caplain said. Bull Citiy invests in 2-4 companies a year and offers 4-6 term sheets to get there.

VCs Are “in a Partnership”

Once they do invest in a company Jones said, “Your’e in a partnership, part of a team.”

Caplain added that Bull City likes to be an active partner in its portfollio companies. “We like to be incredibly active,” he said. “We introduce them to potential partners, customers, and acquirers and help them in getting additional funding. We like to roll up our sleeves and be part of building a company. That’s fun. The other stuff, term sheets and such, is not as much fun.”

Regarding those term sheets, Jones noted that “There are a lot of terms, not just valuation,” and Caplain added, “I don’t think we ever submitted a term sheet and had it accepted totally.” In the ensuing negotiations, he said, “We look for something in the middle that’s fair and we all feel good about.”

As an aside, at the end of the session, Williamson said Windsor Circle is hiring. “We’re looking for rock stars in sales, marketing, product management and Python developers.” Windsor Circle sells retailers customer retention automation software.