Key Takeaways
- Venture capital provides necessary funding and industry expertise to help grow your business.
- Accepting venture capital usually means giving up some control over business decisions.
- Venture capitalists aim for returns and may push for an IPO, a merger, or a company sale.
- Understanding investors’ goals and agreeing on decision-making control is crucial before accepting funds.
- Venture capital may not suit businesses without a plan for a liquidity event.
Venture capital funding can be a game-changer for startups looking to accelerate growth.
Venture capital provides essential capital and invaluable access to investors’ expertise and networks, but it comes with significant trade-offs.
Entrepreneurs must weigh the benefits of capital and guidance against the potential loss of control over their company. Before pursuing venture capital, it’s crucial to understand how it aligns with your long-term business goals and growth strategies.
Understanding 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 startups. 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.
Benefits of Venture Capital for Startups
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.
Challenges and Trade-offs 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 or sale to 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 that you will need to cede some control over 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
Venture capital (VC) can provide the expertise, money, and networking to help your business reach the next level. The disadvantages are the potential loss of control over your company and conflict with your vision.
Conditions under which venture capital makes sense include when an entrepreneur is willing to align with the VC’s goals and can foresee a liquidity event.
Venture capitalists also need a way to get their money out via an exit strategy, such as through an IPO or a merger with or sale to another company.
