Coming to terms with an investor is extremely difficult. But for founders who successfully raised money, the instant cash infusion can help their business scale up. Still, one has to wonder. While venture capital helps you grow, are there any downsides?
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Advantages of Venture Capital
Venture Capital (VC) refers to the money provided by investors in a startup to get it off the ground or take a business to the next level. So, what benefits can you expect once you receive venture capital funding?
1. Raise Large Amounts of Money
The typical venture capital investments begin at $100,000. For most startups, that is a decent amount of money. But VC firms can go higher, up to around $5 million. Such an amount is substantial and can surely beef up a new business.
Every once in a while, a founder may develop a revolutionary idea. VCs that take a fancy may provide $25 million or even more. Not only that, they may even compete amongst themselves to invest in your startup.
In the future, too, you may need to raise more capital. Tapping into venture capital makes it possible for you to access large amounts of money.
2. No Risk to Personal Assets
Venture capitals are not financial institutions like banks that loan money. Instead, they invest in your company. As such, there is no need to put up collateral. This lack of a safety net is also why venture capitalists take a colossal risk whenever investing in new businesses.
On the other hand, startup founders do not have to share the risks as the investors. While many other funding options require you to pledge personal assets as collateral, VC is not one of them.
3. No Monthly Repayments
Startups do not borrow venture capital money. It is an investment made by a venture capitalist in exchange for equity ownership. Hence, there are no repayment schedules and terms.
Because you do not need to service debt, you can use the entire venture capital money to grow your business. Use it to invest in equipment and product development. Or use the money to hire more talents and expand operations. At any rate, you do have an obligation to scale the business and make it profitable.
4. Experienced Leadership and Strategic Advice
An advantage of venture capital is the leadership of the partners who sit on the board. Granted that some of them may not have a startup background or know your specific industry, they have had extensive experience with other startups.
As strategic advisors, their guidance is invaluable as they can help you solve day-to-day and long-term problems. Furthermore, they can help scale a business. Because VCs have a vested interest, they will monitor your company’s financial performance.
5. Help Mitigate and Manage Risks
More or less, 66% of businesses with employees survive at least 2-1/2 years. Where does that leave the remaining 33%? Like it or not, the success rate of startups is not abysmal. In this regard, obtaining venture capital can help startups mitigate risks.
As mentioned, venture capital partners will provide strategic advice and monitor your financial performance. Although VCs cannot guarantee success, they can help you avoid potential mistakes and pitfalls. And if there are problems that arise, they can help you find a solution. With their help, you could say that your success chances are better.
6. Assist in Hiring and Building a Strong Team
One of the reasons why startups fail is the lack of a solid management team. For that reason, they consider it as one of the most crucial factors in deciding to invest or not. Hence, it is safe to assume that you already have a good team if they invest.
But the need to hire employees may arise. For example, an employee leaving your company will need a replacement. As you scale your business, you would also need more personnel.
A VC can help you find and hire the best talents available in two ways. First, they can assist in finding key people. Second, being a venture-backed company, employees view your company as stable compared to those lacking funds. Hence, it is easier for you to recruit and sign highly-qualified people who value job security.
7. Networking Opportunities
The lack of time is a common reason cited by entrepreneurs on why they did not build a professional network. Primarily, they focus on developing a value proposition and running their business. But that is not the case with VC partners. Some of them spend up to half of their time building their network.
Venture capital, in this case, benefits you tremendously. Because one of the things they do is introduce you to other entrepreneurs and investors. As your network grows, you gain access to talents that you can tap. More importantly, these connections can help you build a customer base, raise future funding rounds, and more.
8. Collaboration Opportunities
“Smart Money” is a term used in investment circles to describe the added benefits of venture capital. It is called such because of the extra benefits of venture capital. Besides the others outlined in this section, collaboration is another.
As the founder of a VC-backed startup, you have the opportunity to work with experienced partners. You also meet like-minded entrepreneurs, investors, professionals, and industry leaders. You might get a chance to work with some of them on future projects in the future. Moreover, you might even forge business partnerships.
VC money addresses your immediate needs. But the added benefits of “smart money” not only may help your business grow. It also gives you more opportunities in the future.
9. Increased Publicity and Exposure
Venture capital firms typically have a public relations department. More importantly, they also have good connections with media outlets. Once they provide seed money, they will create a publicity buzz.
Now, there are at least two reasons why they do that. One is to raise awareness of their firms and prestige. Another is to help bring exposure to the startup. Publicity is especially beneficial to relatively unknown entrepreneurs. The idea here is to add credibility to founders and the businesses.
As a recipient of publicity campaigns, you may receive the attention of talented people. It makes the task of finding great employees so much easier. But more than that, you may also attract the interest of partners and other VC firms.
10. Raise Future Funding Rounds
Any VC firm would be more than happy to see the startups they invested in raise venture capital funds again at a higher valuation. For one, it means that the business has a considerable upside. Moreover, it is also how they could strengthen their financial position.
It is, thus, expected that they would help build your reputation and introduce you to other investors. A VC will most likely have the right to invest in future funding rounds. Nonetheless, access to other investors may be necessary if the amount needed is substantial.
Ready or Not for Venture Capital Funding?
After establishing your startup, it is only fitting that you spend the time to develop the business. And if the thought of raising funds comes to mind, then ask yourself if you are ready or not.
It is not the time if you have yet to develop a solid business model and create a thorough financial plan. And, if you do not have a talented team in place, VCs will look the other way. Venture capitalists will only fund what they think will become a successful business. Anything that may hinder success turns them off.
But if you have what VCs are looking for and are ready to scale up your business, then start raising venture capital. There are many ways to find venture capitalists. One of the easiest ways is to take advantage of the Allianse startup investor platform. Once you sign up and fill in the necessary details, they will match you with the best investors that suit your business.