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If you’re ambitious to scale your business, then venture capital (VC) firms are an attractive option, offering large amounts of cash, along with support, mentoring and advice to help you grow fast. However, nothing is without its price. While VC investment may be perfect for some businesses, the trade-off may prove too high for others. So, if you’re unsure whether or not it’s right for you, here are some of the major pros and cons:
Pros of venture capital
- The money is yours. VC firms essentially work by gambling on your future success. Rather than giving you a loan which you have to pay back later, they exchange their investment for a stake in your company, with the hope of profiting from your future success. That means that in the short term, you aren’t saddled with crushing debt and the drain of monthly payments while you’re trying to scale. The money they invest is yours, and you can use it as you please.
- Often comes with extra support. As VCs want to make returns on their investment in your company, they have a vested interest in your success. This means that they’ll do everything within their power (within reason) to help your business grow and ensure you develop in the right direction. As a result, expert advice, mentoring, and training frequently come as part of the package.
- Provides networking opportunities. VC investors did not get to where they are without being well-connected, and that is part of the power of having them involved. Not only do they know other investors, but they also get to meet numerous other startups, as well as individuals with the kinds of skills you may need. So whether you’re looking for partners, employees, consultants, or more cash, they can usually point you in the right direction.
- Enables swift growth. If you’re ready to scale but are finding the process frustratingly slow, VC funding could be just what you need. The money and resources they offer enable businesses to grow and expand far more quickly than they could otherwise and in today’s fast-paced marketplace, swift expansion into new markets can be vital. Firms with growth-enabling capital behind them, therefore, have a definite advantage.
Cons of venture capital
- Loss of some control. The fact that VC firms are invested in your company’s success is great on many levels, but it does also mean that your investors will want a say in the direction your company takes. Precisely how much control you may cede depends a lot on the firm and investors you choose, but it would be a rare VC that didn’t want at least a little steering power over your big business decisions.
- Pitching can be tough. There’s a lot of capital at stake in these kinds of deals, and VC firms will make you work for it. Getting a funding pitch together is an arduous and time-consuming process, which could prove damagingly distracting at a vital stage in your business’s development. And there are no guaranteed results for your hard work – plenty of pitches fail or fall-through during the due diligence process. You have to be prepared for a long slog, particularly if it’s your first round of VC investment.
- You may be pushed too far, too fast. Hitting the ground running with tons of cash behind you sounds like a great thing, for sure. But many businesses actually need to spend a lot of time developing their products and services in the early stages. Trying to scale fast (as many VC firms will expect you to do) can be detrimental to companies which aren’t yet market-ready, or which haven’t built a strong enough foundation to withstand the pressures of the next stage.
- Distraction. As we’ve outlined above, an injection of venture capital comes with certain strings attached. The queries, ideas, and demands of your investors – while often helpful – can also be a distraction from your main goal. You may find that the time you spend keeping your investors satisfied could be invested more profitably in other ways. As with many things, VC investment can be a time-for-money trade-off.
VC investment is often ideal for startups which are doing reasonably well for themselves and are ready to scale – you only need to read the latest news on Techcrunch to see how popular this route is! However, if you’re an earlier stage business (or one which cannot readily adjust to outside control), you may be better off seeking funding elsewhere, whether through a bank loan, crowdfunding or perhaps considering an accelerator or incubator.
This content has been created for general information purposes and should not be taken as formal advice. Read our full disclaimer.
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