The Pros and Cons of VC Funding

Entrepreneurs who have been in business long enough are quite familiar with venture capital. For startups or those who are still thinking about getting financed by venture capitalists, you need to understand what it is about and its process. To help you out, here are some of the advantages and disadvantages of getting venture capital financing.

What it is:

According to the SBA, venture capital is a type of equity financing which caters to businesses which cannot get funding from traditional sources such as public markets and banks. In exchange for cash, venture capitalists would be given company shares and therefore would have an active participation in running the company they have invested in.

Advantages:

·         Aside from funding the business, there are added services which would prove to be beneficial to any startup. These services may include mentoring, alliances and facilitate exits and trade sales.

·         Venture capital firms usually have consultants which have specific expertise in the market so it is easy for the start up to avoid common pitfalls which can result in failure by engaging in business consultations with the specific expert on their market.

·         While most of us have very good ideas on saleable products, there are still some who does not know how to manage the business in its entirety. Venture capitalists may provide a solution for this as they are also open to management consultations and can provide tips and specialists to look for the best talent for your startup.

·         Venture capitalists may also provide other resources such as legal, payroll and tax help.

Disadvantages:

·         One of the biggest concern for entrepreneurs who wish to take on venture capital is that decision making is not entirely up to you as the owner. As mentioned above, venture capitalists would give a promising startup cash in exchange for equity position which means that they would have a say in business operations.

·         If you write a business plan and you indicate that you need x number of funds, you would not get those funds upfront. Venture capitalists almost always set milestones before they release the funds. 

Any financing option an aspiring or startup entrepreneur might take on would need a lot of consideration before a final decision could be made. If you are completely sold on the thought of getting venture capital funding, you have to carefully review all documents and have them reviewed by a lawyer as well.