Advantages and Disadvantages of Venture Capital

Advantages and Disadvantages of Venture Capital

Some good news. The OECD.org site reported that in 2019 alone, venture capital investment provided approximately $46.1 billion USD to startup and other early stage businesses in U.S. alone, indicating the viability of venture capital. We know that sourcing money for our startups can be both an exhilarating and stressful experience, and venture capital investment is no different.

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What venture capital firms provide to business owners and entrepreneurs is, however, completely different from a standard loan from a bank. We know that having the cash in hand to put into your business normally comes with some fine print, so here are some of the advantages and disadvantages of venture capital investment.

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The advantages begin with how banks always work out specific interest deals on loans. Well, securing a venture capitalist investor for your business means there is no interest. There isn?t really a loan to even pay back because you are trading equity in your business for the venture capitalist?s investment. This also means that both you and the venture capitalist are focused on the performance of your business (including the cherished ROI), and if things don?t work out, you aren?t left still paying off large amounts of debt afterwards.

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An additional advantage to being funded by a venture capital firm is that for the amount of resources available to them, VCs tend to only focus on a few investments at a time. A good VC will not only make a monetary investment, but will also give you their professional expertise, experience, and access to their (hopefully) extensive contact list, providing guidance, connections and additional avenues for hiring specialists and employees.

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As good as that sounds, there are disadvantages to working with venture capital firms too that may or may not suit some startup founders. Because VCs are looking to invest in high risk startups that provide good chances of big returns, getting a good ROI quickly is obviously their priority. If they gain more shares than you and the other founders, then you could lose ownership of the company. And no you can?t fire them before this happens.

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The next aspect is like anything when dealing with other people; be careful who you choose to do business with. Even if a firm has a good reputation, the particular person you choose to work with can be the difference between success and failure. How much help and relevant experience do they have to offer? Can you research their previous history or get an idea of their motivation towards your startup and commitment levels?

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Statistically, while it many startups to raise VC funding the odds are quite slim. The general historical average of a VC investment business succeeding is one in ten. Combining that with the complicated and thorough process of getting an investment makes many VC firms highly selective, if not cautious and slow to commit.

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Putting this information together paints a picture of not just a financier, but of an additional business partner who also has their own modus operandi and goals that may clash with your own while simultaneously providing guidance, expertise and access to a wider network and list of contacts.

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Forbes currently has a great list of some of the worlds top venture capitalist firms that you can reach by clicking here if you are interested in looking further into utilising venture capital to fund your startup. Remember to not only research the individual VC and firm, but to also consider whether the specific dynamic of having a VC on your team is suitable for your business strategy.

Post written by?Laurent Gibb

Laurent has spent the best part of 20 years working with European, US and Israeli startups across a range of sectors, helping them scale and reach stable repeatable growth. He has been fortunate to see two startups IPO, one acquisition, a couple pivots, a few get to hypergrowth… and also one or two who didn’t make it… You can find him on LinkedIn and on Twitter.

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