If you are an entrepreneur who has launched a promising start-up but need funding to reach the next level, one option to consider is venture capital.
Venture capital funding has many benefits. In addition to much needed capital at a crucial time, you typically get access to an investor's network of contacts, not to mention their business savvy and experience. Sounds alluring. But before taking venture capital, it's wise to weigh the pros and cons, which we discuss below.
- Venture capitalists can provide money, connections, and expertise to help your business reach the next level.
- However, in exchange for their money, venture capitalists will want a say in how you run your business.
- Venture capitalists also need a way to get their money out, such as through an IPO or sale to another company.
What is Venture Capital?
Venture capital is typically provided in the form of an equity investment in a business. Funding could come from an angel investor who typically targets early-stage start-ups. Or it might come from a venture capital fund, which looks for businesses with high growth potential.
Both angel investors and venture capital funds tend to stick to industries with which they are familiar. Venture capital funds invest in a portfolio of companies. They know many of the businesses they back will fail, but a handful will provide outsized returns that make their investments worthwhile.
Either way, an angel or VC investor will scrutinize your business plan for its potential and conduct 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, investors will likely want a say in how the business is run and may demand a seat on your board of directors in return for their investment.
Advantages of Venture Capital
Venture capital can provide the necessary funding to grow your business. Certain industries, such as biotechnology, need a lot of financing to reach the next level. Of course, you will need to remain diligent about managing this money and make the best use of it.
Another positive about 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 existing expertise. This could include access to marketing and industry expertise.
Disadvantages of Venture Capital
Before you take money from venture capitalists, you will need to understand their goals for the investment. While they tend to invest for the long term, they also want a return on their investment and will be planning their exit strategy.
They may be inclined to exit their holdings through an initial public offering (IPO) or merger with another company. If your plan is to retain control of the business, you and your investor may not see eye to eye. If the future of your business doesn't include a liquidity event that allows your investor to recoup their money, you are likely better off without the venture capital funding.
Another downside to accepting venture capital is you will need to cede some control of decision making. The venture capital firm may have its own ideas about how to run your business, which could conflict with yours. Money comes with strings, so you will have to entertain their ideas as well. Before accepting venture capital, negotiate how much say the firm will have in your business.
The Bottom Line
If you have started a successful business and want to take it to the next level, one option is seeking 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 you will cede some control over your business.