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To VC or Not to VC: Whether or Not You Should Seek Angel Investors


Venture capital is often touted as a source of startup income for entrepreneurs and small business owners. However, it isn't free money; a significant amount of effort goes into securing venture capital, and there are times when it simply isn't worth the effort. Determining whether your business would benefit from venture capital is important; you need to make the decision before engaging in a time-consuming, effort-intensive process that may not yield any results. Here are a few things to keep in mind.

The Odds Are Not in Your Favor

Fewer than 300 startups received funding in 2012. Somewhere between 500,000 and 600,000 businesses are started each year, and you can see how slim the chances of securing funding are. For something that requires as much work as venture capital, the chances are not always high enough to warrant the effort.

Venture Funding Must Be Paid Back

In many cases, venture capital must be repaid at rates as high as 25 percent per year. If your company is growing rapidly, you can still turn a profit; however, many startups don't know how quickly they will grow, or if they'll grow at all for the first few years. It's a high-risk, high-reward endeavor. Because many venture capital firms require collateral in the form of preferred stock, they take what they're owed from any income you make, leaving you earning nothing for a long period of time until you repay the debt.

Venture Capital Is a Personal Relationship

Many experts have compared venture capital to dating. It's not enough for the firm to simply lend you the cash and wait for its payment; many firms want to get to know you. If you have connections within the firm before seeking funding, it can improve your odds of securing a loan. Even without connections within the firm, knowing someone who does is key to improving your chances.

Venture Capital Works Best for Large Businesses

Venture capital firms lend millions of dollars at a time with the expectation of making multiples of that in return. Small businesses simply can't keep up with that sort of demand. Venture capital is best-suited for ambitious startups in fast-paced, high-powered industries.

Take the time to do your research and consider all the various angles around venture capital before you decide to seek it out. You may find that securing a small business loan through your local bank is more suitable to the type of business you want to start.

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