Wednesday, 9 July 2014

Is Venture Capital Funding Suitable For Everyone?


As a first-time entrepreneur, you may find it depressing but it's still a fact that venture capital funding is not meant for everyone. Yes, I do agree, it is the most powerful source of startup fund but winning over the venture capital firms is a task almost impossible. Why am I being so rude? Not at all.

According to Small Business Administration, out of 6 lac new businesses starting every year in the US, only 300 are able receive venture capital. This shows that the percentage of those lucky entrepreneurs is just around 1 percent. I won't say it is only about the competition; there are various other factors that ultimately determine whether you should at all waste your time and energy on the method or not.

Even if yours is a small but high growth company, raising venture capital can be still challenging. You have to remember that as an entrepreneur, your biggest assets are your brain and your time, so be very careful and act smartly before you spend them, especially your time. At this stage, each second is precious for your business, so you must have to be very sure about which method to approach. A cost-effective strategy should always be there in your mind.

If the venture capital firms go through 100 business plans, they might end up considering only one or two for an investment. Well, that's how it is and you have to accept these choosy investors just as they are. And why they do so? Well, investing in a startup, especially at the seed-stage involves huge risk. So they want to be extremely sure before investing in a startup.

Now, there are many reasons why the startups get rejected by the venture capital firms. Either they don't have a unique product/service, poor market potential, no proven potential or any signs of future  growth and profit making or may be they lack a good management team or there can be many more reasons.

Also, the suitability factor should be evaluated not only from the investors' point of view but also yours. Suppose you have a unique business idea, you have a highly efficient management team that is driven by commitment and quality, your market potential is simply superb, in short every has fallen in place but, you are highly concerned about your
ownership in the business and you are not in favor of sharing your responsibilities with anyone. Then
what?

If this is the case, you have to think thousand times before approaching for venture capital. Venture capital firms typically get actively involved in the company's decisions and share almost 50 percent, if not more, of the ownership in the business. They will invest hugely so they will always make sure that the capital is being utilized in the best possible way so that it generates huge profits.

Now, it's kind of a necessary evil for many. You know you need the capital; you know it is only the venture capital that can easily help your business grow and expand. But is that OK if it is at the cost of your control over the business? For many entrepreneurs, ownership is not a concern as they are more bothered about getting rich so they desperately go after the venture capital firms. So it is solely up to you to decide what matters most to you.

Another very important thing is the overall expenditure involved in receiving and utilizing the venture capital. Even if you manage to get venture capital funding, the average cost of the venture capital is usually very high.You have to ensure that your company will be able to sustain the rate of growth at any cost. Entrepreneurs often do not pay much attention to this aspect which ultimately results into remarkably hgh expenditure. Also many venture capital firms often require preferred stock in exchange of their investment, which can be detrimental for a small startup.

Therefore approaching the venture capital firms may although sound quite exciting but it is often not suitable for all businesses. In any case, the biggest demand is  a unique idea, an efficient management team, a scalable market and your determination about sharing your ownership in the company with the investors.Only then you can think of spending your time and resources on venture capital funding.

If everything falls in place in your case and a venture capital firm invests in your business, then rest assured that your company will receive the biggest boost it could ever get from anywhere. Not only in terms of capital but you will also get free access to knowledge, guidance and a great network of industry experts.

So, are you ready to hear from the venture capital firms? Do you think your startup is suitable for this method? Feel free to share your thoughts, ideas and experiences with the venture capital firms, if any.

For more information on venture capital, feel free to get in touch with us at mergeralpha