funding.
And unfortunately, this is also one of the most important steps when growing our business. After all, we can’t do anything without money. Most of the time, especially in the early stages of our growth, we rely on our personal resources, and maybe we have some rich friends or relatives who believe in our idea and want to help us. But truth be told, this option is not sustainable. Not for the long term, anyway.
So what do we do? We start looking for alternative funding options. We do our research, we attend networking events, we pitch to investors, we talk to people about our business and about our mission to find the right investor, and we especially get a good hold of what option is best for us.
So that’s when we start considering venture capital funding!
VC funding involves investors providing to early-stage startups that they believe have high growth potential in exchange for an equity stake in our company, effectively becoming partial owners. This might be an amazing opportunity for us to get the funding we need in order to take our business to the next level, but it’s also important to weigh the pros and cons of venture capital funding before making a clear decision.
You might wonder why this kind of investment is so popular. Easy – VC gives us, as business owners, the chance to expand our operations and tap into new markets. It is the ideal answer for those of us who already have an idea in the implementation process but also need money to make it a true reality. And a success, might I add!
But while this might be the ideal solution, unfortunately, VC funding also comes with disadvantages – disadvantages that many of us who are entering this world might not be aware of. But they need to be taken into account because they can affect the long-term success of our startup. After all, a VC can make or break your startup.
Venture capitalists bring more than just capital to the table!
When we’re thinking about VC or about investors in general, we automatically think about the money they will provide. And it’s true that access to substantial amounts of capital (quickly) is the most significant benefit of venture capitalists. Typically, they invest large sums of money, which can help us sustain ourselves and especially fuel rapid growth for our startup. We can hire more employees, invest in marketing and advertising, and especially develop new products and/or services.
But in reality, venture capitalists will help us achieve our goals through more than just their money. VCs offer valuable expertise, strategic guidance, and, especially, industry connections. They will be our mentors in the truest sense. They often have extensive experience in the industry and have helped many other startups navigate the same challenges that we might be. Even more so, they will be here to provide advice and resources on product development, marketing, operations, sales, and overall business strategy. It’s much easier to have someone by our side who has been through this before to help us manage risk. While it’s great to learn from your mistakes, it’s even better to learn from other’s mistakes.
And that’s not all! Yes, VCs will stand as our mentors, but what will help us just as much as the funding provided will be the connections. Venture capitalists have a vast network of contacts in various industries and can introduce us to other people. Potential customers, partners, and even other investors. It will be like a snowballing chain of networking opportunities since it will also increase publicity and exposure. And let’s face it – we all need this, especially those of us who still have a small and new company.
Even more so, although not talked about enough, venture capitalists will also stand as our moral support. We all know how challenging and difficult owning a business is. And most of the time, especially if we don’t have a partner, we’re alone in this journey. Our friends try to understand us, but they have their own life, our family has expectations from us, and it’s extremely easy to fall into the trap of isolation and burnout. That’s why having a VC who believes in us and our business can be a huge motivator to keep pushing forward.
However, big bucks come with big risks!
As with any business decision, there are also potential risks and downsides to working with VCs. But once we accept the VC funding, there’s an implicit common agreement that we’re giving up a certain control over our company. As entrepreneurs, we sometimes forget that with the money from investors, we’re also selling a portion of our company – and with this, we’re also giving up a share of the decision-making power.
“Most entrepreneurs, especially inexperienced ones, tend to pay attention to how much money they’re getting and the percentage of their company they’re giving up,” states Joe Benianto, who is an investor involved in founding and growing 4 startups.
And he’s right! Investors’ input is extremely valuable, there’s no denying that – but sometimes, we might not fully agree with their advice. However, despite being our company, we will no longer be the only one making the decision. Instead, investors will also have a say in our company's direction and decision-making process. So, in some cases, we might have to take the company in a direction that we do not truly agree with.
Even more so, another disadvantage of VC funding is that it can also create pressure to focus on short-term results, even if it means sacrificing long-term sustainability. Most importantly, they expect accelerated growth. After all, they do expect a high return on their investment. This could be great if your business model can be implemented quickly. But if your vision and your strategy might require some time, you might deal with a certain amount of pressure to perform well.
Having experienced entrepreneurs backing you might sound incredible for our growth – and it is! But the process of finding them can be so daunting and challenging. In fact, in some cases, signing with a suitable venture capitalist might even distract us from growing our business and our goals. Even more so, we must acknowledge that obtaining funding can be extremely difficult since the access to VCs is quite scarce.
After reading about the advantages and disadvantages of VC, you might want to reconsider your options.
Obtaining funding is an important decision – it might be the most important one if you ask me. So, we must take into consideration our needs, our possibilities, and even our wants. If you decide that the pros are outweighed by the cons, do not beat yourself up! There are still a lot of funding options available.
Crowdfunding can be a great alternative. This way, you can tap a large pool of investors with the help of an online platform. Angel Investors are also a possibility. These individuals are great for early-stage companies as they can focus more on the needs of the business and help the entrepreneur(s) with their challenges and objectives. They also do not put the same pressure as venture capitalists do. Even though angel investors usually will not get you the same money as VC, it is a safer bet. And let us not forget that government funds are there to take. There are a lot of programs for entrepreneurs to get funding. It can be challenging to secure, but it is worth trying.
Ultimately, venture capital funding can be a big boost for startups and a powerful tool. But unfortunately, it is not without its downsides. So, before deciding to pursue venture capital funding, it is vital to weigh the benefits against the disadvantages and consider if it is the right choice for your company.
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