If you are an entrepreneur who has launched a promising start-up but need funding to reach the next level, one option to consider is venture capital.
Venture capital funding has many benefits. In addition to much needed capital at a crucial time, you typically get access to an investor's network of contacts, not to mention their business savvy and experience. Sounds alluring. But before taking venture capital, it's wise to weigh the pros and cons, which we discuss below.
Key Takeaways
- Venture capitalists can provide money, connections, and expertise to help your business reach the next level.
- However, in exchange for their money, venture capitalists will want a say in how you run your business.
- Venture capitalists also need a way to get their money out, such as through an IPO or sale to another company.
What is Venture Capital?
Venture capital is typically provided in the form of an equity investment in a business. Funding could come from an angel investor who typically targets early-stage start-ups. Or it might come from a venture capital fund, which looks for businesses with high growth potential.
Both angel investors and venture capital funds tend to stick to industries with which they are familiar. Venture capital funds invest in a portfolio of companies. They know many of the businesses they back will fail, but a handful will provide outsized returns that make their investments worthwhile.
Either way, an angel or VC investor will scrutinize your business plan for its potential and conduct due diligence before deciding to invest. They typically have a long-term investment horizon and are prepared to be patient as you grow your business. Besides giving you capital, investors will likely want a say in how the business is run and may demand a seat on your board of directors in return for their investment.
Advantages of Venture Capital
Venture capital can provide the necessary funding to grow your business. Certain industries, such as biotechnology, need a lot of financing to reach the next level. Of course, you will need to remain diligent about managing this money and make the best use of it.
Another positive about venture capital funding is that it opens up resourcesfor an entrepreneur. You can now also tap into the venture capital firm’s resources, including its network of connections and existing expertise. This could include access to marketing and industry expertise.
Disadvantages of Venture Capital
Before you take money from venture capitalists, you will need to understand their goals for the investment. While they tend to invest for the long term, they also want a return on their investment and will be planning their exit strategy.
They may be inclined to exit their holdings through an initial public offering(IPO) or merger with another company. If your plan is to retain control of the business, you and your investor may not see eye to eye. If the future of your business doesn't include a liquidity event that allows your investor to recoup their money, you are likely better off without the venture capital funding.
Another downside to accepting venture capital is you will need to cede some control of decision making. The venture capital firmmay have its own ideas about how to run your business, which could conflict with yours. Money comes with strings, so you will have to entertain their ideas as well. Before accepting venture capital, negotiate how much say the firm will have in your business.
The Bottom Line
If you have started a successful business and want to take it to the next level, one option is seeking venture capital funds. Venture capitalists are savvy investors and they usually have a long-term horizon. While venture capital firms can provide capital and expertisefor your business, taking the money also typically means you will cede some control over your business.
FAQs
If the future of your business doesn't include a liquidity event that allows your investor to recoup their money, you are likely better off without the venture capital funding. Another downside to accepting venture capital is you will need to cede some control of decision making.
Do startups need venture capital? ›
In order to maintain the most control over the company, a startup should seek out other funding options first, but that's not a requirement. Venture capitalists can offer a large amount of funding, and a startup doesn't have to have funds or assets before seeking VC.
Do you need money to be a venture capitalist? ›
Many venture capitalists will stick with investing in companies that operate in industries with which they are familiar. Their decisions will be based on deep-dive research. In order to activate this process and really make an impact, you will need between $1 million and $5 million.
Do you need funding for your startup? ›
Founding a startup is an ambitious undertaking. Not only do you have to have a great idea, but you also need to assemble a team, build a product, and bring it to market. All this takes money, which is why most startups rely on outside funding sources like venture capitalists or angel investors.
How much money do I need to start a venture capital fund? ›
Setting up a fund may vary depending on the stage the fund wants to invest in, the sector or industry, and the performance objectives for its portfolio companies. Full-time GPs typically require between $20 MM and $40 MM per head in fund size to cover salaries and expenses, assuming a 2% management fee.
Can a startup succeed without funding? ›
Of course! Later stage venture capital is highly desirable for many companies. While early-stage funding can limit your growth potential (if you even have access to it), waiting to turn to an angel investor or VC later on with a proven business model is likely to be successful.
What are the odds of getting VC funding? ›
Some estimates suggest that only 0.05% of startups are funded solely by VC firms1, and that the odds of a startup being funded by either an angel investor or a VC is around 3% 2 .
How to get VC funding for your startup? ›
There's no guaranteed way to get venture capital, but the process generally follows a standard order of basic steps.
- Find an investor. Look for individual investors — sometimes called “angel investors” — or venture capital firms. ...
- Share your business plan. ...
- Go through due diligence review. ...
- Work out the terms. ...
- Investment.
If you're in a big market, developing a disruptive product requires significant capital to build the infrastructure and get off the ground. Taking VC money is not only worthwhile if your market is as big as you think it is, but it might also be your only funding option for the amount of capital you need.
Is it risky to be a venture capitalist? ›
VCs are willing to risk investing in such companies because they can earn a massive return on their investments if they are successful. However, VCs experience high rates of failure due to the uncertainty involved with new and unproven companies.
A startup can succeed without an investor, but it will be much harder. The benefits of having an investor are that they can provide the capital necessary to get the business off the ground, they can provide advice and mentorship, and they can help connect startup to their network of contacts.
Do you pay back venture capital? ›
Unlike loans requiring a personal guarantee, if your startup should fail, you are not obligated to repay venture capitalists. Likewise, there are no ongoing monthly loan repayments.
How can I fund a startup with no money? ›
How to get a startup business loan with no money
- Offer collateral.
- Consider adding a cosigner.
- Know a lender's requirements.
- Determine whether you'll be able to repay.
- Write a business plan.
- Launch a scaled-down version of your business.
- Take advantage of free resources and services.
- Take a second look at crowdfunding.
Minimum investment amounts in VC funds vary widely, depending on the fund's size, strategy, and target investor base. They typically range from a few hundred thousand to several million dollars.
Is it hard to start a VC fund? ›
If you haven't already made some good investments — it's going to be tough to start your own fund. Go work at a fund first and make some good investments there. Assuming you have at least a partial track record, then, there are two-and-a-half basic paths on how to start a venture capital firm.
What is a good ROI for venture capital? ›
The expected ROI for Series A investments can vary widely, but generally, investors aim for a return ranging from 3x to 10x their initial investment. However, it's important to note that the actual ROI can be influenced by factors such as market conditions, industry dynamics, and the startup's growth trajectory.
What does venture capital do for startups? ›
VCs not only provide essential financial backing but also offer strategic guidance, industry connections, and operational support, all of which are crucial for nurturing these startups. One key reason venture capital is crucial for deep tech innovation is the substantial financial resources required.
What percentage of startups raise venture capital? ›
Only 0.05% of startups get VC funding.
Does starting a business require capital? ›
In order to start your new business, you need startup capital. This term refers to the money that a business owner requires to commence operations. This funding helps the business meet initial needs like office space, hiring and marketing resources, etc, .
What is the capital requirement of a startup? ›
Definition. The capital requirement is the sum of funds that your company needs to achieve its goals. Plainly speaking: How much money do you need until your business is up and running? You can calculate the capital requirements by adding founding expenses, investments and start-up costs together.
