Pros and cons of venture capital
You’ve got a business niche and you don’t want to miss the market. But you can’t grow without funds and that’s where venture capital can help you.
Like most of us, venture capitalists want a return. So, when working with a venture capitalist, it’s really important to get the goals of each person ironed out at the start.
Let’s look at the positives and negatives of venture capital.
The best thing about getting venture capital is that it not only accelerates your business, it can help to really explode it.
Perhaps growing organically will either be too slow or take too long because you might miss the opportunity in the market segment.
This is particularly relevant in today’s world where things are changing so quickly, and the speed of change is extremely fast.
Venture capital can help you when you need to take the first move or get the advantage before other people catch up.
If, as a business owner you can’t grow your business because you don’t have access to money, you can use venture capital to move it to the next step.
Also, another huge benefit of venture capital is that you get the benefit of other people’s experience and advice.
A venture capital company doesn’t just give you a bag of money and say goodbye, they help to carry that bag and walk the journey with you. They give you contacts, sometimes their extended management team, and often lots of advice.
Venture capitalists want a return and often have a fixed timeline to get their money back, normally between five and seven years.
Most venture capitalists are looking for minimum of a 10-times return on their money. So, if they put in $100,000 they may want to sell out for $1 million.
Jamie Davison, co-founder of Carbon group, says a venture capitalist wants an exit strategy, and that can be different to what the founder is trying to achieve.
The venture capitalist is a commercial thinker and wants a return. But the business founder may be tech based or more hands on or, just have a good idea. Generally, a business founder is not as business minded.
These different approaches can potentially cause problems that need to be worked out at the start. For example, as a business founder, you may want to grow the business in a certain way.
You might want the business to stay closely owned, or closely held and keep growing it organically. The venture capitalist is solely trying to get a return on their money.
That might be to build up to a certain revenue number and then merge, or look for a trade sale, or take it to an initial public offering (IPO).
The other potential thing to consider is a loss of control. Unpick every part of the deal before you agree.
Then – even if you are still the majority owner – you’ve now got other people or other partners to report to. It’s about working out what everyone wants to achieve.
The two main views are usually return on investment versus watching an idea or business grow.