The early days of a new business are certainly the most difficult in its lifecycle. All founders will be aware of the ominous stats associated with new businesses: 30 per cent fail within the first two years of being open, 50 per cent during the first five years, and 66 per cent over the first 10 years.
With just one-third of startups expected to still exist after a decade of operations, it means that the first steps that founders take are incredibly vital.
All businesses need to be well-financed, and it can prove challenging for owners to turn their ideas into tangible products and services on a bootstrapped budget. This is where venture capital enters the fray.
(Distribution of investments into VC companies 2013-2018, by continent. Image: Statista)
This isn’t to say that there aren’t significant drawbacks associated with venture capital – so let’s take a moment to weigh up some of the biggest pros and cons for business owners:
Pros:
1. Large volumes of capital can be raised
While the avenues of bootstrapping and business loans can lead to a perfectly functional and prosperous business, there are few more effective ways of raising funds than through venture capital.
When it comes to venture capital, it’s not unusual to see sums ranging from £100,000 to £25 million being injected into a business to help it achieve its early goals. This means that there’ll be no bootstrapping insight – and companies have the freedom to grow with confidence at a rate that they control.
2. Risk can be mitigated
One of the biggest perks of venture capital is that businesses gain invaluable help both financially and strategically.
Yes, the rate of failure for startups is still 20 per cent for the first year. Still, entrepreneurs can benefit from the presence of a venture capital associate when it comes to making the right decision in complex scenarios.
Risk can also be mitigated by welcoming an experienced team of backers. The prospect of seeing a return on their investment helps the team to steer clear of risky situations – providing collaborative peace of mind and clarity of thought.
3. Owners can benefit from leadership and advice
Regardless of whether your startup is your first, second or fourteenth endeavour into the world of business, it can always help to have another experienced player within your team.
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Many successful startup founders end up becoming venture capital partners after they exit their business. This means that you can not only gain funding but also take on board the advice and leadership offered by someone who knows their stuff when it comes to the lifecycle of new businesses.
Even if they don’t have direct experience in founding a company, venture capital associates will be richly experienced in assisting the startup process of new businesses – making them a potentially invaluable asset in the delicate early months and years of your business.
4. Opportunities for exposure and publicity
Many good venture capital firms have strong PR and media contacts, and it makes good business sense for them to provide positive exposure for your startup.
Such opportunities for publicity would be virtually impossible for bootstrapping startups to attain and the brand power along with the credibility a healthy level of media coverage could bring for your new business might just enable you to scale faster and build a customer base in half the time.
5. Personal assets can stay off the table
One massive perk for business owners looking to go down the venture capital route is that, in most cases, personal assets like homes don’t need to be pledged as collateral should the business flounder early on.
While the act of pledging personal assets, or startup costs, can be part and parcel with many business funding options, the vast majority of venture capital agreements will leave a founder’s belongings off the table.
Cons
1. Owners lose their share of the business
Of course, the most significant drawback when it comes to taking on venture capital is that the founder’s ownership of the startup is reduced.
While, as a business owner, you may feel comfortable with the percentage of ownership you’re surrendering to venture capital associates, it’s important to remember that many companies outgrow their initial funding and will need to raise more capital. As a result, by the time your business has scaled to a comfortable size, you may have lost your majority share and any decision-making power along with it.
2. Sourcing investment can be distracting
Many founders can become consumed with raising capital. So much so that it leads to oversights within the startup itself.
Fundraising can be a lengthy and drawn-out process, and shouldn’t come at the cost of managing the company. In the early days of a business, there’s enough of a juggling act taking place in generating interest, managing utilities and finding places to operate – it could be a disastrous move if such integral processes are neglected.
3. Heavier expectations
The weight of expectation is significantly higher when calling on venture capital to help your business grow. Venture capital firms will expect a return on their investment and will be continually monitoring your company to ensure that it appreciates in value.
While taking on significant sums of money to help your startup grow is undoubtedly an effective way of paving the way for faster scaling, this may not necessarily occur immediately. Many businesses expand at different rates depending on external factors relating to their respective industry, location and levels of exposure.
Money certainly helps, but in some cases, it could be better to allow your company to develop without the pressure brought by venture capital naturally.
4. The formal reporting structure is necessary
When receiving venture capital funding, you’re obliged to convert your business into a more rigid internal structure stemming from an established board of directors.
While doing this will help the company to scale and improve transparency, it can also limit a startup’s flexibility and the level of control that founders have, too.
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Venture capital firms typically impose this kind of structure to aid the overseeing of the company as well as providing better opportunities to expose and resolve problems with better efficiency. However, this internal structure can often prove to be relatively claustrophobic to founders who are used to running their business without the need for formally reporting the decisions and actions being taken.
5. Negotiating capital can be tricky
It’s very rare that a startup would find much leverage when it comes to negotiating capital. Typically, businesses look for venture capital when there are very few other more organic sources of money and thus find themselves with little power to negotiate funding – other than to outright reject a proposal.
With this in mind, it’s important to be calculative when you try to arrange venture capital for your business. It’s important to consider this type of funding as a last resort when looking at achieving your business goals but also when the need has been recognised, be sure to begin looking for venture capital early. This represents your best chance of negotiating a healthy revenue stream for yourself and your company.
In an ideal situation, multiple investors would be interested in funding your company in return for a share. Such leverage may only be possible if you act swiftly and decisively.
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Image Credit: Ben Rosett
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