Most startups dream of being a VC-backed business at some point and often go to great lengths to make it happen. After all, sizeable monetary resources and specialized expertise that can easily help a startup grow are almost unmatchable.
Realistically speaking, it’s not all sunshine and rainbows as most of the time VCs offer a resounding no to an investment pitch. It’s not all doom and gloom either with these people if you find yourself within their investment parameters.
So, there are specific venture capitalists advantages and disadvantages you need to be aware of if you’re firmly settled on scoring this type of funding.
Arguably the best of venture capitalists advantages is the access to necessary capital essential for fast growth and scalability. It’s easy to think that a huge amount of money will solve most of your problems and challenges, especially in the business world. Such reasoning is close to the truth with VCs. It can help a startup survive the early years by building on vital infrastructure in no time: talent, technology, data – everything you need to get off the ground.
When working with venture capitalists, you’re usually not legally obligated to repay if the startup goes belly up (which is always a possibility with startups). The lack of burden to pay back the initial investment is not a sham or anything like it in case you’re wondering. VCs have strict supervision by regulatory bodies so you can rest easy.
Another fundamental advantage of VCs is the fact they come with a lot of valuable baggage in the form of expertise and advice. As a startup founder, you have to be a jack of all trades: an inspiration, motivation, and above all – a leader. VCs make all of it easy (or fairly easier) by offering the wisdom, guidance, and consultation of people who have been doing this kind of thing for a long time. They can hone your strategy, show you the fastest way forward, and help you avoid potential obstacles.
A direct “side effect” of the vast breadth of knowledge is access to personal connections and networks. It represents the most straightforward path to forging business relationships that will ultimately make certain the quality and performance of your product or service are up to par. These include legal work, engineering, accounting, and every other professional service relevant to startup’s needs.
On top of it all, a VC can help with additional funding. A huge part of their help stems from their involvement: it is often seen by other investors (ranging from banks to private and corporate VCs) as a seal of approval. I guess you can say that money follows good money.
In a nutshell: when you bring a venture capitalist to the fold, you’re bringing in all of their resources and connections as well.
For starters, understand that your chances are slim. VCs are notoriously hard to entice due to a huge amount of risk involved but also due to the massive volume of business proposals. Add to the fact that VCs differ in terms of investment size and area of activity and you come to the conclusion your starting point is not so good.
If you’re a control freak, you’re not going to like what you’re about to read. One of the more acute venture capital financing disadvantages is the (complete) loss of control, depending on the money involved. Some venture capitalists insist on a bigger stake in the company, which leads to a loss of autonomy in decision-making processes. If they are particularly aggressive, they will request special rights (voting, board seats, etc.) that outweigh yours.
In line with that development, bringing on investors puts you at risk of becoming a minority owner. Your equity becomes diluted in order to issue new shares to your investors. As numerous businesses outgrow their initial funding, they turn to additional rounds from VC companies, resulting in startup founders losing the majority ownership in their own company (along with control and decision-making power).
Generally speaking, all business operations will be under round-the-clock scrutiny. The moment you accept VC dollars, you are expected to scale and grow quickly so you get a fixed amount of time to get 2/3/4x times on ROI and show an exit roadmap. Such expectations, however (un)reasonable they may seem, can stress out even the toughest of founders.
I always thought one of the more underreported notions regarding venture dollars is the fact you need a personal or trusted reference. VCs get bombarded with unsolicited emails and business proposals that tend to go unnoticed. You are far more likely to receive funding if you can get a warm introduction to a VC directly, which isn’t always the case.
The middle ground
Here’s why a venture capital investment is hard to dismiss: 2018 was a record-breaking year for VC investments, and it seems the upward trend will likely continue. Yet, there are fewer companies being funded by venture capital companies with an emerging trend of larger round sizes. As we wait for 2019 figures, there’s a certain level of indecisiveness concerning venture capitalists advantages and disadvantages – namely, whether VCs are worth it or not.
I’ll say this, though: if you need immediate scaling of your high growth and can match VC parameters while fully leveraging their infrastructure – by all means, go ahead. It will be a tough, super challenging and demanding but also highly rewarding ride.
On the other hand, if you managed to bootstrap your way and aren’t willing to forego the control and vision of your company (even if it means getting money, expertise, and industry connections in return), VC money may not be an option you want to explore. I suggest seeking other funding options like accelerators or angel investors.
Either way, stick to the business fundamentals: grow at a pace you want and can afford. That’s how you make sure you and everybody else comes out better off than when they went in.