When it comes to the various kinds of equity financing, business owners have a myriad of options before them. One of these choices is venture capital investments, which can give your business an incredible boost in terms of cash flow but can also lead to complications and control issues down the road. Venture capitalists are well-known for making high-risk and high-reward investments that can give small businesses the leg up that they need to really get going in their market. When your options for funding are limited because you are a new start-up, you are a very small business or your assets are simply restricted, venture capital can be the one financial outlet that comes to the rescue. Here are a few of the considerations to make when faced with the prospect of a venture capital investor.
Basics of Venture Capital
In order to determine whether venture capital investments are going to boost or burden your business model, it is important to understand the fundamentals of how they work. Venture capital investments are ideal for smaller, entrepreneurship-based businesses who cannot seek funding elsewhere. In particular, new start-ups are an especially good target for venture capitalists who wish to invest in high-risk, high-return business possibilities.
Venture Capital: What Do I Have to Lose?
When you are approached by a venture capitalist who wishes to exchange cash for shares in your business and an active role in its controlling structure, you may not think twice about saying yes. But there is a lot more to venture capital investing than just a chunk of cash. Here are some of the things to think about when considering a venture capital investment:
- What will the investor demand in return for their investment?
- What sort of control am I willing to give an investor in the business?
- Am I comfortable with an investor having governance over the leadership and strategic marketing plans of the business?
- What percentage of the company profits am I willing to promise to an investor?
- If the business fails to do as well as expected, what will the consequences be for both my business and its investor?
- How long am I expecting to receive financial support from this investor, and what is my business plan if that timeline does not work out?
- How can I plan for successful long-term business growth that has a future that does not rely on venture capital?
- What is my exit strategy if the investment does not go as planned or if the terms are changed?
What is my investor’s exit strategy and how does that affect my business? As you can see, getting involved with equity financing of this type can be quite complex. Because venture capitalists are taking such a big risk in their investment, they can be very demanding when it comes to company decision making and shareholding, so make sure that you reach an agreement with your investor before control becomes an issue.
It is also a good idea to remember that venture capitalists may not want to be a part of your business forever. While some do want a long-term hold in the company, others want to contribute the cash, collect their part of the profits and then get out of the way. Whichever strategy your investor makes will have a major impact on the future years of your business finances, so make sure you are prepared for whatever might happen.
Fortunately, there are many resources to support your decision-making process when it comes to venture capitalists. The National Venture Capital Association, for example, is a great database that can help connect your business with venture capitalists who are looking for companies just like yours. Becoming involved with an organization like this can help you determine what funding sources are right for your business and which ones you might want to pass up.
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