Articles in the Series:
- Pros and Cons of Using Own Money
- Pros and Cons of Credit Cards
- Pros and Cons of Borrowing from Family and Friends
- Pros and Cons of Bank Loans
- Pros and Cons of SBA Loans
- Pros and Cons of Angel Investors
- Pros and Cons of Venture Capital
- Pros and Cons of Crowdfunding
- Pros and Cons of Business Plan Competitions
- Pros and Cons of Supplier Credit
Pros and Cons of Venture Capital
Venture capital is an important source of equity for start-up companies. It is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Learn the pros and cons of financing a business with venture capital.
Advantages of Venture Capital
- Venture capital funding is committed and long term. They look for three to five times their investment in five or seven years.
- Venture capitalists offer you financial strength that will allow you to compete in the marketplace fast.
- If you huge capital requirements, venture capital firms may be ideal. The average investment is usually between $500,000 and $5 million.
- There are no repayments or interest to be paid as VCs invest their money in exchange for equity or ownership share in your company.
- They take higher risks – but expect higher rewards as well.
- A reputable VC investor gives the company credibility and prestige to your business, as well as opens doors to some large customers and other investors.
- They provide experience, advice, and mentoring. They are objective, helpful with networking and hiring the right people.
- Their vast network can be leveraged for further investments or important contacts. Once their deep-pocketed friends have invested in your venture, they may be enticed to invest as well.
- You retain management control of your business – investors will not get involved in the day-to-day running of your business
- There is no need for collateral such as personal assets
- It is easier to get listed on a stock exchange.
Disadvantages of Venture Capital
- Venture capital funding is not generally suitable for small investments; and they are not interested in home-based businesses such as daycare or handyman businesses.
- They generally don’t look at start-ups and early stage
- You lose part of the ownership of your business; worse, there is the risk that you could lose control over your own company.
- Raising venture capital is demanding, costly and time consuming, and it can take a while to find a suitable venture capital investor. VCs conduct pretty thorough due diligence work; so some VCs take anywhere from 6 months to a year before deciding to invest in a venture.
- There is the risk of losing independence in managing your business. If the VCs believe that you no longer the right person to run the company, they can fire you and your management team (or give you a lesser role in the management of the business).
- Venture capital firms expect a big return on their investment dollar – much bigger than a typical angel investor. Expected rates of return can be as high as 50 percent annually.
- VCs focus is for a profitable and mandatory exit; which could run counter to the founder’s concern for employees and customers. They are in it for the money, not for you.
- VC may move your company towards an Initial Public Offering (IPO) of publicly traded shares faster than might be best for the long-term health of the business.
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- How Angel Investors Can Benefit a Small Business
- 5 Strategies to Raise Capital for a Small Business
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