If you’re looking to set up a new business and are concerned that you don’t have sufficient savings to help you to achieve your business goals and ambitions, it could be worth looking into alternative forms of finance.
One of the most lucrative but most difficult ways of injecting your startup with the money it needs to get going and begin scaling is through venture capital.
While personal savings and bank loans tend to be limited regarding the amount of money entrepreneurs can access, venture capital firms can often be found willing to invest anywhere between $100,000 and $25 million in new businesses that they believe holds potential.
Naturally, there are caveats – mostly emanating from the fact that venture capital funding usually requires business founders to give up a share of their company in return for their cash injection. Although this may not seem appealing, there are plenty of perks behind choosing the route of venture capital, and here are seven of the biggest benefits:
1. Significant sums can be raised for your business
The primary benefit of calling on venture capital funding is the significant injection of cash your business will receive.
While other methods of funding are typically more modest in volume, because they’re essentially paying for a stake in your business, the money available through venture capital can be virtually limitless, depending on the potential the company holds for prospective investors.
Of course, there’s an argument that bootstrapping your startup and allowing it to scale naturally will reap greater rewards for founders, but the ability to begin the scaling process with a cash injection immediately can pay dividends in enabling entrepreneurs to develop their endeavour ahead of competitors, and at a time that suits them.
2. External guidance can help with scaling
Venture capital firms can be called upon for much more than just financial boosts. Many venture capital associates will have previously been business owners and would’ve had experience in guiding companies through their formative stages in the past. Having these figures on hand to share their industry expertise can be invaluable to founders – especially those who haven’t developed their own endeavour before.
Yes, a venture capital firm’s motives come from looking after their own stakes in your company, but the insights that can be provided in terms of risk assessment, as well as in human resources, can be invaluable to a business owner who would otherwise be looking at going it alone.
3. Personal assets stay safe
Many loan-based financial assistance options for startups can require business owners to pledge personal assets like their homes as collateral should they be unable to pay their debts.
However, as FitSmallBusiness notes, this isn’t usually the case when it comes to venture capital. Startup costs, homes, and other valuable assets are kept off the table when venture capital agreements are signed.
4. No need for monthly repayments
When a venture capital firm chooses to invest in your business, they do so for equity in your company. This means that there’s no need for entrepreneurs to pay back any investments on a monthly or yearly basis – unlike the case with personal and business loans.
This can feel liberating during the formative months of your business. After all, your revenue will be better positioned for reinvestment within your company, as opposed to automatically leaving your account in repayments. However, it’s worth bearing in mind that the overall cost could be greater when it comes to selling your business or turning it into a public company.
5. Potential for greater exposure
There’s certainly plenty of added perks that come from venture capital investors. One significant upside is that many firms have a PR group along with media contacts. As they’ve paid for equity in your company, it’s in their interest to utilise their contacts to ensure that your brand gets as much positive exposure as possible.
Having access to a dedicated PR group can lead to publicity on a scale that bootstrapping businesses could only dream of. In the ever-dynamic world of business management where competitors can jump from the woodwork at any time, sometimes having the right endorsements at the right time can make all the difference in taking a small business to the next level – and this particular perk of venture capital can’t be underestimated.
6. Networking opportunities may be easier
When you’re going it alone, there can barely be any time to even consider networking. However, partners at a venture capital firm can spend as much as 50% of their time working on building their network as a means of assisting the companies that they’ve invested in.
By gaining the help of venture capital associates working on providing your business with new prospective clients, partnerships and collaborators, your endeavour could seriously benefit from high-quality revenue streams, better exposure and invaluable development opportunities.
7. Subsequent rounds of funding could be possible
Sometimes scaling can occur at different paces, and sometimes it can be worth looking at additional revenue streams.
While this can be a tricky process at the best of times, venture capital firms have an interest in seeing your company raise additional funding at a higher valuation, and are well-positioned to assist you in finding the right firms to provide extra funding at a later stage in your business’ life cycle.
Furthermore, venture capital firms can often invest in future rounds of funding themselves and can supply startups with more money as the endeavour continues to grow.
Keep aware of the risks
There’s little doubting that venture capital is one of the most effective ways of catapulting a struggling startup into a slick revenue-raising machine. However, it’s important to be aware that in agreeing to accept a large injection of cash into your business, that you’re also giving up a share of your company.
When you exchange funding for equity in your business, it means that you’ll lose the freedom to make influential decisions without first consulting with stakeholders.
It can also prove difficult for business owners to negotiate venture capital agreements due to the lack of leverage they hold. This can, at times, lead to unsatisfactory business arrangements that could lead you to lose out in the future.
Fundamentally, venture capital can be an excellent way of taking a strong business idea to the next level. However, make sure that you’ve explored your options, and act before desperation sets in. Remember at all times that you’re acting in the interests of your startup – not in the interests of accessing a windfall.