Venture Capitalist Funding: Pros and Cons

Succeeding in business is all about making connections. For entrepreneurs, these connections could be getting the funds to grow their dreams into established businesses.

When it comes to startups, funding plays a major role in their survival, apart from the necessary skills. Funds can be gotten through grants, loans, angel investors, venture capitalists, and more.

What is venture Capitalist Funding? How does it work? We’ll see these and more.

Read: How to Prepare Your Business for the Future: 7 Effective Steps

What is Venture capital funding?

Venture capital funding is a form of funding where startup capital is invested into a small or startup business or company in return for equity in the company.

Venture capitalists don’t just invest in any startup business, they invest in businesses with strong growth potentials.

Venture Capitalist funds are usually high-risk/high-return investments. Venture capital funds are used by emerging industries or high-tech industries as “seed” money to accelerate their growth.

Note that Venture Capitalists are different from Angel investors. Angel investors are wealthy individuals who invest their money into upcoming companies, while Venture capitalists use the money raised from limited partners to invest in a startup.

How does Venture Capital Funding work?

Investors can decide to focus on different stages of venture capital, as companies have different stages of venture capital as they grow. These stages are:

  • Seed stage: As the name suggests, this is the first series of official funds a company receives from its investors. It could be used for product research or business plan development. In exchange for these seed funds, investors are given equity or preferred stock options in the company.
  • Early-stage: This stage requires larger funds, as the company is already in its development phase and has its most viable product or service. At this point operations are kicking off, the start off requires more funding to run smoothly.
  • Late-stage: This funding is usually for more mature companies that have generated revenue and show proven growth, even if they may or may not succeed.

Read: MBA In a Box: How to Start a Company from Scratch

For the Venture capital investors,  if the company goes public and becomes successful they make a profit and repay the limited partners that invested their funds. They could also sell their shares to other investors to make a profit.

It’s clear what venture capital funding means, for entrepreneurs thinking of getting funds through venture capitalists,  what are the pros? Let’s find out.

Pros of Venture Capital Funding

  • The fund is yours: Venture capital investors fund your business at their own risk. In essence, if your business grows and succeeds, they win but if not they accept their losses. You are not obligated to pay back in case of a loss, unlike loans where you pay back even if the business fails.
  • Company growth: For an entrepreneur to hire more staff, they have to ensure they have a steady source of income or a company can’t just start big without months or years of planning. But with Venture capitalists investments, startup funds help boost your business to the next level immediately.
  • Connections: One venture capitalist can connect you to others who can help make your business profitable. They help with networks that can help scale your business.
  • Risk Management: Seasoned venture capitalists can help you scale your business by introducing a team that would oversee your operations cost and growth to avoid major issues especially in the first few years of the business.
  • Publicity and Exposure: Venture capitalists or venture capitalist firms usually have media platforms or contacts. As investors in your company, it’ll be to their benefit to push your business to the limelight as this would mean more customers, employees or even investors.

These are a few pros of Venture Capital Funding, as with an advantage there is an accompanying disadvantage, what are the cons of this type of funding?

Cons of Venture Capital Funding

  • Shared or Reduced Ownership: To raise funds, owners would have to issue shares to investors. To raise additional funds for their business, founders might have to sell large shares, this automatically transfers decision making and control to the majority shareholder. To limit this, unnecessary funds are necessary.
  • Finding investors is a herculean task: You need a pitch-perfect deck to convince your investors, and it still isn’t a guarantee. Follow up meetings and rejections are a lot to stomach when looking for investors.
  • Your company may be too new: By this, we mean, you just started this company, it’s still new, you don’t know what it would take to make it profitable in the long run. You might just end up spending large funds hiring and making purchases and incurring expenses that won’t boost your company in the long run.
  • Performance schedule: Investors want to see value for their money. So they may only invest more funds if the business meets specific milestones measured against established metrics.
  • You can Lose your business: If a founder is performing poorly, he runs the risk of being voted out. If you do not engage with your board of directors communicating your choices and decisions with them you could lose the business and someone more competent business

Any business requires a lot of consultation, not just ideas. So, before you decide on what form of funding works for your business and your goals consider the pros and cons.

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