How entrepreneurs finance their company is one of the most crucial decisions that they will make during the course of their startup.  How to finance or get money to fund the new business becomes their key focus area.Finances are required to buy space for the business, furniture and equipment, supplies and also to pay the money to employees. There are several ways to get the money that a new business needs. Businesses can be funded via personal savings or arranging for a bank loan. But these days, investing in venture capital is also a good way to start a business as it has rapidly emerged as a major source of financing for many new and start-up firms.  With venture capital, you can obtain large quantities of money which can be of help for businesses with big start-up expenses or businesses that want to grow rapidly.

Understanding venture capital

Venture Capital refers to capital provided by external investors for financing struggling, growing and new businesses. The venture capital investments are high risk investments but offer the potential for above average returns. A venture capitalist is a person who makes such investments. The venture capitalists target companies that offer significant potential for growth and an opportunity to earn a high rate of return in a short period of time. Venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the stage where they have been able to avail bank loan or complete a debt offering.

What kinds of businesses are attractive to venture capitalists?

Venture capitalist prefers to invest in entrepreneurial businesses. This does not mean small or new businesses. It is more about the investment’s aims and potential for growth, rather than by current size. Such businesses intend to grow fast to a significant size. As a rule of thumb, unless a business can offer the prospect of significant turnover growth within five years, it is unlikely to be of interest to a venture capital firm. The venture capital investors are interested in companies with high growth prospects, which are managed by experienced and determined teams who are competent of turning their business plan into reality.

Benefits of Venture Capital

Provision of funding: Venture Capital provides the funding that a company needs to expand its business. It also offers a number of value added services like mentoring, alliances and facilitate exit.

Venture Capitalist can be invaluable source for information: Venture Capitalist can be an invaluable source of information, resources, and contacts to help you be successful. The venture capitalists have experience building companies themselves so they can really help you think strategically about how to grow and be successful.
Business Consultants: Many venture capital firms have consultants on their staffs that are well-versed in specific markets. This can help a start-up firm avoid many of the pitfalls that are associated with start-up business ventures.

Human resources: Venture Capital firms also provide consultants who are experts in hiring to find the best talent for start-up companies. This can help a start-up company avoid the hazard of hiring the wrong people for their company.

Shortcomings of Venture Capital

 Cost is high: The cost of venture capital is very high.

No patience:Venture Capitalists are not patient investors; performance must meet or exceed expectations within a specific time.

Take control:Venture Capitalists are known to take control of under-performing companies.

Creating tremendous pressure:Venture capital brings with it tremendous pressure to create a liquidity event but this frequently results in bad decisions being made to launch products too early or enter into the wrong markets.

Give up equity position: Most venture capital companies require that the company give up equity position to them in return for their funding. This amount is not small, and in many cases it can be as much as 60% of the equity in the company. This means that the entrepreneur is not controlling their business; it is being controlled by the venture capital firm.

Business plan:When a business plan is written and submitted for financing considerations, most finance companies will agree to sign a non-disclosure agreement. But this is not the case in most venture capital firms. Venture Capital companies will refuse to sign a non-disclosure agreement due to the legal ramifications of doing so. This can put ideas from an entrepreneur at risk.

Those companies who have high growth potential such as electronics, manufacturers, green technologies and other high tech ventures are usually the ones who fare best with venture capital funding. So, before you decide that venture capital is right for you, make sure that you know all of the pros and cons and do your research.

Artika Shah