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August 28, 2012

The Merits and Demerits of Venture Capitalist Funding

When it comes to finding sources of funding for a new venture, entrepreneurs have to choose between debt and equity. With equity financing, entrepreneurs can opt for venture capital and with debt financing, they can borrow loans from lending institutions.

One of the biggest challenges to sourcing for venture capital is the high standard of expectation from investors. Venture capitalist firms tend to go for fast growing companies that are likely to go public in a few short years or be acquired. It is the entrepreneurs’ responsibility to demonstrate that the venture can be competitive in that fast growing industry.

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In order to prove the viability of a venture, an entrepreneur will have to buckle down to some hard work. He or she will have to put together the necessary paperwork including preparing financial projections, industry analysis reports and make presentations. Once this is done, he or she will need to seek a third party opinion to find out if the material will impress potential investors. With the well prepared proposal in hand, the entrepreneur will now have to identify the right venture capitalist to make his pitch to.

Every entrepreneur should also remember that a move toward venture capital means giving up full ownership. A venture capital investment basically means handing over a portion of ownership in the business in exchange for funding. That means the venture capitalist will be entitled to a portion of the proceeds should the business be acquired. Although this may feel unfair, an entrepreneur should keep in mind that if the business proves highly successful, he or she will be entitled to a portion of that sizable return.

One benefit that venture capital investment has over debt is the access to expertise and knowledge. Venture capital firms tend to finance based on the industry they are knowledgeable about. The management teams of such firms are often made up of professionals and veterans who would be able to provide valuable advice to a start-up company. They often require a seat on the board of directors and use that position to both monitor their investment and offer assistance in making the business a success.

Venture capitalists also tend to have ample funds at their disposal. This means a business is not likely to be deprived of financial assistance if it shows strong potential. They also reach out to the connections they have in business to ensure booming growth.

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Finally, with venture capital injection, a business does not have to concern itself with short term financial obligations. With a loan, a business has to start making repayments within a short period of time. Venture capital is far more flexible allowing businesses to focus on their growth.



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