If you operate a start-up, you will most likely be aware of the term venture capital (VC). It’s an idea that often comes up when discussing funding, growth, and innovation. Most owners of young businesses set it as a goal to secure funds from venture capital firms, especially as a means to bring their ideas to fruition.
However, before going on the journey to acquire VC funding, it is crucial to first understand what it entails and how it can be leveraged for business success.
Venture Capital: Inside the Term
The first question to ask is – what is venture capital?
Simply put, venture capital is a form of financing provided by investors to startups and small businesses that they believe to have long-term growth potential. It differs from traditional bank loans in that they come from well-established investors, venture capital firms, or financial institutions that are willing to take on higher risks in exchange for potentially substantial returns.
Additionally, venture capital also differs from another form of funding which is private equity. The latter is a form of investment from individuals or firms as well, but it happens when an investor purchases shares of private, already established companies with the intent of delisting them from any public stock exchanges. The stage at which the investment occurs is the main difference between private equity vs. venture capital.
VC funding involves equity financing, where investors provide capital in exchange for ownership stakes in a business. Entrepreneurs will receive the necessary funds to grow their business, in exchange for ceding partial control and sharing future profits with the investors.
Several types of venture capital funding can occur depending on the stage that a certain company is in. It may often occur during the seed stage where companies need starting resources to develop products or conduct market research, or during early stages (usually referred to as the Series A stage) where hiring more personnel, scaling operations, or making service improvements is a priority.
By the time a start-up reaches the growth, or Series B stage, they are already quite established but may still need funding to expand further. VC funding rounds that happen at this point will largely focus on market expansions, or on major production and operational changes.
A successful example of venture capital funding poses significant benefits for both the start-up and the VC firm. However, most venture capital investors may want to form an exit strategy just in case the need arises. Exit strategies may be acquisitions by larger companies, or initial public offerings to recoup any investments made.
The Benefits & Risks of Venture Capital
There are several advantages of venture capital for start-ups. Perhaps the chief role that it plays in a fledgling business is that is drives innovation – particularly in technology and other high-growth sectors. VC investors often look for start-ups that are revolutionizing their fields, while the companies on the receiving end of the funding use their resources to make these breakthroughs. This synergy in the quest for innovation allows both investors and entrepreneurs to work towards their goals.
Throughout that journey, entrepreneurs will also likely receive expert guidance and networking opportunities from those who invested in their businesses. VC investors will share insights, business acumen, and strategic expertise that business leaders can use to fuel growth even further. Moreover, they can leverage on their investors’ vast networks to find potential customers, strategic partners, and even future investors.
On the flipside, some disadvantages of venture capital may also arise over time. One is equity dilution. Accepting venture capital means that entrepreneurs must give up a portion of ownership, and possibly full decision-making rights. It’s best to weigh the benefits of receiving funding against the potential loss of control over their company.
Expectations from investors can also become a problem in the long run. It is possible that the investors who put stock in a business make unreasonable demands on company performance and profitability. Functioning within this high pressure environment can result in company owners making decisions haphazardly, working overtime to meet investor demands rather than ensuring steady business operations.
As such, it’s imperative to first decide on whether or not you should secure venture capital funding in the first place. Consider VC funding if your business has a clear path to scalability in a relatively reasonable period, and strong strategies for market or product expansions. Make sure that your start-up is meeting a unique need as well, since disruptive companies are often those that have a high growth potential.
How to Secure Venture Capital
If you think the advantages of venture capital outweigh the potential risks, the first step you must take is to develop a strong business plan. Emphasize the vision and goals of your company, create an enticing USP, product line, and back up your plans with relevant data from the market. Investors will be more likely to buy what you’re selling if you can sell it well.
It’s necessary to build a great team too. VC firms often invest in a team as much as they do in an idea, so capable and enthusiastic personnel can instill confidence and credibility.
Of course, it is also beneficial to practice due diligence. Like any business opportunity that comes along, working with a VC will most likely start with vetting financials, market position, and potential risks. Make sure that all regulatory and financial needs are complied with so that no unnecessary hurdles arise.
All in all, it’s no secret that venture capital funding can be a direct route to business growth and success. If you feel that securing VC funds is the way to go for you and your business, reach out to us and let’s get started.
