Venture capital financing can be an excellent way to turn your startup dream into a vibrant reality if done for the right reasons. When starting a company, you’ll need capital to get your business off the ground and sustain regular operations.
Capital is required to buy equipment, supplies and to monetarily compensate team members. Raising venture capital cash is sometimes the only choice for fast-growing startups wanting to scale quickly.
However, founders need to be careful when seeking out VC funding. For example, they shouldn’t try to obtain financing if they don’t have a viable product. They need to make sure their business operations are optimized so there's a return on every single dollar invested. This often means that it’s wisest to seek VC financing when your enterprise has predictable profits.
What’s venture capital financing?
Venture capital financing is a form of private equity financing that investors provide to startups that have long-term growth potential. Venture capital usually comes from wealthy individuals, investment banks, pension funds, insurance companies, and other types of investors.
These are considered exceedingly risky investments but with a huge potential payout. They're also illiquid, meaning you can't quickly turn them into cash.
The 9 advantages to seeking out venture capital funding
Raises large amounts of capital
Most startup loans are limited to $5 million. Qualifying for them can be incredibly challenging. However, a startup can get venture capital in amounts as small as $100,000 and as large as over $25 million if it’s a more mature startup.
Startups can undergo multiple funding rounds, which lets companies generate more significant amounts of capital than would otherwise be possible.
Some say that bootstrapping your startup and letting it scale naturally would be better in the long run. However, the ability to immediately scale with a massive infusion of cash can ensure that your business concept leapfrogs past competitors.
Monthly payments aren’t required
A venture capital firm pours money into your startup because it gets equity when the business is sold. This means you won’t have to make loan payments and frees up capital you can use to grow your company.
If your startup goes under, you’re not on the hook for the money because it isn’t a loan, so there’s no obligation to pay it back.
Personal assets aren’t at risk
Most of the time, you won’t have to pledge personal assets when getting funding. This is unlike other startup funding options (such as loans at traditional banking institutions), where you'll have to use your home as collateral.
Experienced leadership and advice
Investors provide more than funding. They can do everything from letting you peek at their impressive Rolodexes so you can make invaluable connections to getting them to promote your startup concept to the world.
Lots of founders become partners at VC firms after they leave their companies. Their experience in scaling a business, solving day-to-day problems, and monitoring financial performance makes them an invaluable resource for new founders.
Experienced investors often serve as strategic advisors to their portfolio companies' management teams. This can help mitigate financial risk. Having an advisor to help out when a problem raises its ugly head can vastly improve the odds of making a sound decision.
Super busy founders usually don’t have a lot of time to build the robust professional networks that are an invaluable asset to companies. However, venture firm partners spend as much as 50% of their time beefing up their networks to help the companies they’re investing in.
Having access to these connections can help you hire essential employees, raise future funding rounds, build out a customer base, and forge new partnerships.
Easier to build a team
Many prospective employees consider a venture-backed startup less risky than a startup with no venture funding. This makes it easier to recruit top-tier talent.
Most VC firms have a public relations department and extensive media contacts. It’s in their best interests to get media exposure for your company, which means you’ll benefit from it too. This publicity can get you noticed by prospective customers, clients, partners, and employees.
Helps to raise future funding rounds
VC firms want to see your startup raise additional funding at a higher valuation because this strengthens their financial position. Therefore, they’ll often introduce you to VC firms that can assist you at later stages.
When you receive venture capital funding, you’ll get the opportunity to collaborate with firm partners, other startup founders who’ve received funding from the firm, and experts from the professional networks of venture capitalists.
Disadvantages of venture capital
Funding is scarce
VC firms receive over 1,000 proposals for every four startups they fund. This shows you how difficult it is to secure venture capital financing.
That’s why you should consider an accelerator or an incubator. These organizations often offer as much as $150,000 in funding and a three-month course that helps founders maximize the chances of startup success.
The more funding rounds there are, the more your equity is going to be diluted. This is because new shares need to be issued to investors. Depending on the deal, a venture capital firm might even end up with a majority share (more than 50%) of your company. If this happens to you, you’ll lose management control.
To reduce this risk, only raise the amount of cash you need.
Finding investors is time-consuming
Funding can take months, so it’s best to start before funding is critical. This way, you’ll give yourself enough time to continue growing your startup and raising enough money to fuel your growth.
Venture financing is expensive
In the long run, venture financing is going to cost you a lot more than if you had just taken out a traditional loan.
For example, let’s say two startups needing $1 million each have a valuation of $10 million. The first enterprise takes out an SBA loan for 10 years at 11.5% interest. The other company raises $1 million for 10% equity.
If both businesses sell for $100 million in ten years, the first startup will have paid $687,145.33 in interest. However, the second startup would have had to fork over $10 million upon exit.
A board of directors is required
When you receive venture capital financing, you’ll have to set up a board of directors and a more stringent internal structure. This is to ensure transparency. However, this can reduce the amount of control you’ll have over your own company.
Your business is expected to scale rapidly
A startup that accepts VC cash needs to be planning for an exit. This is usually an IPO or an acquisition. If this isn’t your objective, it would be best not to seek out venture capital funding.
VC firms expect your business to scale and grow rapidly so they can get a good return on their investment. This can place a lot of stress on you to ensure the company grows quickly.
While having investors can be valuable, it’s sometimes best not to have the pressure of investors clouding your decisions if you can avoid it.
It’s possible to lose the business
If you’re underperforming, you can lose your business. You could also lose it if you’re engaging in behavior that decreases shareholder value or if you're reckless and use company funds for personal use.
Take an evolutionary leap with Hunt Club
Venture capital financing is right for founders who don’t have experience scaling a company. Venture capital partners usually have that experience in spades, making them a tremendous resource for the neophyte founder.
It’s also good for founders who need specific industry expertise to enter new markets they have limited experience in. A VC firm with the right knowledge can help you avoid costly mistakes in these situations.
Venture capital funding can help your startup make an evolutionary leap to its next stage of growth. Another way to make that leap is by hiring the right people who can fuel that growth.
At Hunt Club, we can optimize your recruiting process so you get the high-caliber talent you need.