If you are an entrepreneur who has built up a successful business and are looking to take it to the next level, one strategy could be to tap venture capital funding. This provides an inflow of money from savvy investors and can help you build up your business. That sounds alluring, but you should weigh the pros and cons carefully before you decide to take this route.

What is Venture Capital?

Venture capital is typically provided in the form of equity investments in your business. The source of the funding could be angel investors or venture capital funds. Angel investors are individuals with a high net worth and money to invest. They might prefer to invest in industries with which they are familiar. Venture capital funds typically invest in a portfolio of companies, some of which will be successful enough to repay them for their investments even if some businesses in the portfolio fail. These sources of venture capital will look at your business plan to decide if it has potential. They will also vet your business and do their due diligence before deciding to invest. They typically have a long-term investment horizon and are prepared to be patient as you grow your business. Besides giving you capital, they also tend to want to have a say in how the business is run. For instance, they will likely want a seat on your board of directors. 

Infusion of Funds

The major advantage of tapping venture capital funding is that you will now have access to the funding necessary to grow your business. If you have big growth plans for your business, this is one way to accomplish them. Certain industries, like biotechnology, need a lot of financing to grow to the next level. Of course, you will have to be diligent about managing this money you raise from venture capitalists so as to make the best use of it.

Another Resource to Tap

Another positive about going for venture capital funding is that it opens up resources for an entrepreneur. You can now also tap into the venture capital firm’s resources, including its network of connections and its existing expertise. This could include access to marketing and industry expertise. (Read more in, "The Rise of Corporate Venture Capital.")

But Your Goals May not Align

Before you take money from venture capitalists, you will have to be clear about what their goals are for the investment. While they tend to have a long-term horizon, they are also eventually looking for a return on their investment. And they may be inclined to exit their holdings through an initial public offering (IPO) of stock, or through a merger with another company. If your plan is to run your business and retain control while building it up and taking it to the next level, there may be a misalignment there. If your long-term plan does not encompass the possibility of an IPO or a merger with another company, and you just want to continue to run your business as a family enterprise, you are likely better off without the venture capital funding.

Loss of Independence

Another downside to accepting venture capital money is that you will have to cede some control of your business decision making. The venture capital firm is likely to have its own ideas about how best to run your business, and if you think your ideas are better, there could be a clash. Since you are taking their money, you will have to entertain their ideas as well. Before you accept venture capital money, negotiate how much say the firm will have in your business decisions.

The Bottom Line

If you have built up a successful business and want to grow it further and take it to the next level, one tactic is to seek venture capital funds. Venture capitalists are savvy investors and they usually have a long-term horizon. While venture capital firms can provide capital and expertise for your business, taking the money also typically means that you will cede some control over your business.