CHAPTER EIGHT: Part C – Even if venture capital seems perfect for your business on the surface, you need to understand the advantages and disadvantages of this funding strategy; in comparison to other small business financing options.
This will help you decide on whether to approach a VC or seek an alternative finance source instead. So without wasting time, below are the advantages and disadvantages of raising capital from venture capitalists.
Five Advantages of VC funding
- Since VC funding is not a loan scheme, there is no repay schedule; which means you don’t have to repay debt as a cost of doing business.
- Many VCs have consultants and professionals on their staff that have deep knowledge of specific markets. These experts can help your business avoid many of the pitfalls that are usually associated with start-ups.
- Being an entrepreneur does not automatically make you a good business manager. However, since VCs will hold a percentage of equity in your business, they will most likely have a say in how it is managed. So if you are really not a good manager, this can be a significant benefit.
- Because they are obligated to make profit from their investment in your business, VCs often provide HR consultants (who are specialists in hiring talents) to hire the best staff for your business. This can help you avoid hiring the wrong people.
- Because VC firms are under strict supervision by regulatory bodies, there are very few or no unscrupulous VCs.
- VC firms are very easy to locate because they are documented in business directories.
Seven Disadvantages of VC funding
- Some VC firms require much more ROI than expected. In many cases, it can be as much 60 percent of the equity in your company. This, in effect, means the VC firm is controlling your business; not you, the owner.
- Usually, VC firms will want to add a member of their team to your company’s management team. While this is generally to ensure the success of your business, it can create internal problems.
- Another big problem you will most likely face when you opt for VC funding is that you will give up many key decisions on how your company will operate. This is because the VC firm will require to be informed of any major decision you make, and they usually have the power to override such decisions.
- Though they generally treat information confidentially, VC firms usually refuse to sign a non-disclosure agreement due to the legal ramifications of doing so. This can put your ideas at risk, especially when it’s new.
- Because they are keen on making profit, and they invest huge funds (which means they take large risks), venture capitalists take too long to decide whether to invest in your business or not.
- Most VC firms do not release all the needed funds up front. Rather, they usually release funds in stages with an eye on the expansion of your business. Because this approach may not be suitable for your funding plans, it may ruin your business.
- Usually, VC firms want to close the deal and get their investment back within three to five years. If your business plan contemplates a longer timetable before providing liquidity, VC funding may not be suitable for you.