Venture capital is funding you acquire by selling some of your equity in your company. This option is attractive to businesses because it comes with benefits which can altogether be parlayed into massive growth very quickly. Whichever your growth objectives, be they faster or slower, any of your funding choices will be both rife with risks and packed with potential rewards. No question, there's a density of opposing possibilities in a funding decision.
Who Can Benefit from Venture Capital?
The very mention of VC can garner strong reactions out of people. The reality of VC is that, like so many things, it can be used in very unwise ways, and it really all depends on your goals.
First, a word on false perspectives: Just because your business could grow fast with VC, doesn’t mean you should grab this option, or even that you really need this kind of funding. Further, just because you get VC funds, doesn’t mean you’ll definitely grow fast.
Also, it's true that there are nightmare VC investors who make life miserable for entrepreneurs, treating them like inferiors and barking out directives. But, the great majority are not at all like that. Most VC investors are very helpful, and they're fully empathetic to the challenges entrepreneurs are struggling with. VCs who have been entrepreneurs are especially abundant resources for highly-valuable insights.
Altogether, it makes sense that the possibilities for growing a company quickly using VC are so appealing to many new businesses. This funding approach does work very well for many businesses, both new and long-established, that are looking to fund growth.
What are the Benefits?
Control — The notion that a VC can rightfully control an entrepreneur is incorrect. VCs can't get a board seat with voting rights until they've invested huge sums. Even if their participation does rise to that level, it is rare that they would acquire a contractual right to vote you out as the CEO of your company. So, VC investors can't really stop you from making decisions. They do have their expectations of having their input taken into account, but unless you've legally signed away your control, you're still the boss.Growth — Of course, you have to be optimistic about growth when you're starting a company from scratch. If you didn’t believe that people will love your product or service, you wouldn't have embarked on a business. Now, you're itching to scale it. If you can see a viable path to that by simply being able to pump up inventory and marketing, then VC can be just the fuel you need.
Profitability — If your revenues are good, but still not covering expenses, that's stressful. If you really fear unsustainability, and you need a way to get profitable and fast, and you've exhausted all possibilities for increasing sales fast enough, and for deeper cutting into expenses, and for digging deeper into your own pockets, then maybe taking on VC investors is the most practical move.
Solution — Throwing cash at it, is not always the right solution to meeting objectives or longer-term goals, but it can blanket your business with the security of having the cash for operating and to invest as necessary.
Image — A company backed by VC instantly acquires credibility. Your business is suddenly getting noticed and talked about by everyone, the media, and your current and prospective clients. And, you're getting more recognition and respect from your competitors.
Network — VC investors are often veterans of your industry, people who can connect you with powerful decision-makers and excellent recruitable talent, and get you past obstacles to otherwise unobtainable resources, outlets, and other opportunities that are paramount for optimum growth rate.
Security — With your cash position firmly secured, you can spend much more time focused on growing your business, and much less time seeking loans or credit. And, you don't have to postpone any more important purchases due to cash shortages.
Money — The main benefit of VC is obtaining a large number of funds to enable execution of your ideas. Investors who have confidence in your business plan and the research supporting it can be very aggressive in funding it. Typical VC investments are between $500K and $5 million. That's just not gettable by a startup from a bank.
Knowledge — You also will most likely be getting your funding from investors who are highly experienced in business, and possibly specializing in your industry. VC investors are typically very willing to provide you with an abundance of very helpful advice and guidance. They don't want to lose money from taking a chance on you.
Validation — The reality is that even most successfully scaling companies do not remain bootstrapped. Eventually, most will look to outside investors to raise capital. Bootstrapped companies are kept afloat by accelerating growth and fending off threats from financially stronger and better branded, more asset-rich, and otherwise better established competitors. The strength of VC and expert investor support provides market validation, establishes valuation, and even may render some amount of liquidity for your original employees.
Prestige — Funding also can provide prestige, and potentially leads to that fancy office space, which can help with recruiting. These are all-powerful, legitimate motivators for taking funding, and points we seriously considered.
Well, now it sounds like a pretty dreamy opportunity. Is VC funding perfect?
Possible Downsides to Consider
Purpose — Raising money contemplates some specific purpose for the acquired capital. You need to have a viable purpose for the additional cash obtained through a funding round.
Stress — You will probably be necessarily running your company at a loss after receiving VC. It's an uncomfortable position. Don't underestimate just how stressful it can be to operate in this negative position over an extended period.
Pacing — Even when you know your company is likely to be attractive to VC investors, the time and energy you can expect to spend on fundraising can be precious resources that you need more to keep from falling further behind your competition, especially in those critical earliest days of operation, when every boot on the ground can make or break the difference in the daily battle to gain a critical inch of ground in your market. So, be sure you really have the bandwidth to take on the pursuit of VC while executing on your early performance objectives.
Ownership — VC advantages come at a cost. The more money investors pump into your business, the more they may want to be directly involved in it. You may find yourself needing to let go of operational control. Especially if your investor(s) pass the 50% stake threshold, you are at increased risk of giving up your ownership of your business.
Expenses — Taking VC money can become dangerous when you use the cash to fund payroll, or other large recurring expenses that you can’t just eliminate. If you exclusively use VC to fund customer acquisition, you can always slow down spending on it if cash is low. But, when your staff's jobs are at stake, making adjustments is much more difficult.
Before pursuing venture capital funding, ask yourself if can take direction from outsiders, if you're really ok with relinquishing some control of your company, if you would you be able to accept losing ownership of it, if the VC investor you're considering can provide you with the connections, expertise, and general support you need to accomplish the goals that have brought you to entertain the possibility of accepting VC.