There are various ways for companies to raise finance, such as a business owner can conduct their business with finances if they already have enough savings. Shareholders and the public can also help when it comes to raising money for a company.
But what occurs in the case of small businesses and entrepreneurs? Of course, when you start a new entrepreneur one thing that comes to your mind is how you will be funding it. You need funds to cover employee wages, product or service developments, and other basic business needs.
Venture capitals are one of the various options that you can choose when you are searching for funding. Venture capital can be an excellent fit for new startup businesses. However, you should be aware of the disadvantages that come with venture capitalists.
Here, in this article, we will talk about the advantages as well as the disadvantages that come with venture capitalists and whether it is worth it for your business.
So, let’s dive into the deep!
What is venture capital funding?
Venture capital is a sort of private equity generally offered to small businesses or startups. Venture capital is when well-off investors, investment banks, or financial institutes finance small-scale or early-stage businesses.
Venture capitalists invest money into the startups in return for shares in the company. The main objective of the company is to be profitable and to offer them a good investment return.
It is also risky for venture capital investors as the businesses are in the very early stage so they cannot be sure whether the business will succeed or fall. It is a fact that 90% of businesses fall. That is why venture capital investors will typically take equity and also take a board position in that business so that they can steer and makes the chances of success.
There are advantages as well as disadvantages in venture capital funding. So, let’s take a look at the pros and cons of venture capital in more detail.
Advantages of venture capital:
Attaining venture capital has various advantages. For the fast-growing startups that want to scale quickly, venture capital is a viable option. Besides money, venture capital also helps secure future rounds of funds. Some other potential advantages are:
#1. Substantial funding:
Venture capitalists work to pull their funds from various sources so that they can fund the startups. In turn, your startup business can benefit from a large sum amount that you may not be able to raise from elsewhere.
Most small-scale business loans are difficult to qualify for. Also, you have to pay back business loans whereas venture capitalists investments you don’t need to pay back. You can also raise various venture capital investment funding.
Venture capital investors let small businesses obtain a large sum amount to fuel their businesses. They also provide the founders with the runway to get their heads down and concentrate on conducting their business.
#2. Provide risk management support:
Obtaining venture capital funding helps small businesses or startups to manage the risk inherent in most startups. By getting an experienced team to oversee operations and growth, startups can overcome major issues.
The rate of failure of the startups is still 20% in the first year. However, when a tough situation arises, having an experienced investor can be helpful to improve the odds of making a good decision.
#3. No monthly payments:
When a venture capital investment funds your business, it will do so for equity in the company. This means that unlike personal loans and small business loans, you don’t require to make monthly repayments. So, you can more concentrate on your business performance and that freed up money you can use elsewhere in the business performance.
#4. Experienced leadership and advice are available:
When startup business owners become the partners of experienced venture capitalists they can obtain excellent leadership strategies and advice to run their business. Venture capital investors often have the experience to scale a company, solve long-term as well as day-to-day issues, and monitor financial performance.
#5. Networking opportunities are available:
When you will be more focused on the performance of your business you don’t have much time to network with people who can help to run your business. Your venture capital partners will put their time to build a network for the company they have invested in.
If you access this network it will help you to forge new partnerships, build out your new clients, and raise future rounds of funding.
#6. Collaboration opportunities with industry experts and other available startups:
When you receive venture capital funding, it will often be referred to as “smart money”. This means the money you receive to run your business from the venture capitalists, it comes with the added benefit of the expertise of venture capital firms.
Sometimes, you will work with other partners of the venture capital firm, and take guidance both of their networks to put your business on the right track to growth and success.
#7. Assistance with hiring and building a team:
The team you require to start your business and the team is required to scale are not the same. However, venture capital firms can help you to put the right people in place in the company to help you grow.
Also, many experienced professionals look for venture-backed startups than traditional startups with no funding. So, collaboration with venture capitalists, makes it easier for the startup business to hire a talented and well-rounded team.
#8. Increased publicity and exposure are likely:
Most venture capital investors have a public relation team as well as a media contact, and it will be in their best concern to get exposure for your startup. Collaborating with venture capital firms helps in credibility for new startups.
The increased publicity helps the startups to get observed by potential customers, employees, partners, and some other venture capital firms interested in raising funding.
Disadvantages of venture capital:
The approach of raising a large sum of money that will help to scale and grow your business means you need to give up some control of your company. There are some diligence processes that you have to pass to please people.
Let’s have a look at the disadvantages of venture capital:
#1. Founder ownership stake will be reduced:
When raising a funding round, you require to dilute your equity for issuing new shares to the investors. Various companies outgrow their initial funding and require to raise additional funds from various venture capital firms. This leads to losing some percentage of the equity of the founder in their own company. The founder also reduces decision-making and controlling power.
The founder can mitigate this issue by only raising the fund that is required.
#2. Investors can distract the founder from his business:
New startups find it will be beneficial to raise funds through venture capital when the other sources are seems exhausted and larger money is required for their business’s growth. However, raising funds can take a long time and it will be tough to execute the processes of the business in this period.
Starting the business processes before funding can be critical. But, the founder should continue to manage the business operations as well as raise enough money parallel to keep growing.
#3. Funding is comparatively scarce and tough to obtain:
According to some reports, only 0.05% of startups are able to raise money through venture capital. We don’t want to put you off but you must know how hard it is to get approved. This is one of the biggest challenges that you may face when raising a funding round.
Also, it can be a lengthy process; sometimes it may take 9 months as the venture capital firms will perform due diligence to ensure that your startup is suitable for them to invest. They will be sure that you will earn a good return on your investment.
#4. The overall cost of financing is too expensive:
Giving up equity in your business may seem to be inexpensive compared to taking out a loan. However, you can only realize the cost of equity of your company when it will be sold. Venture capital provides much more than funding to your business such as advice and introductions.
However, you need to make the decisions very potentially if you have other funding options.
Conclusion:
Before approaching venture capitalists you must consider its advantages and disadvantages. With venture capitalists, you can access a large number of funds for your business with no monthly payments, but it will cost the equity.
Venture capitalists also provide you consultation and guidance in growing your business, but you will give up an amount of control over your business in the process.
