What is Venture Capital?
Venture capital is a mechanism that is developed by a group of investors. Its aim is to give support financially to business startups and entrepreneurial talents that are at risk of falling due to a lack of finances. They do this to get substantial financial gains.
Such investors deal with startups that have the potential to grow into significant investments. To increase this probability, they tend to invest in multiple companies. It is usually a try and error method, so they aim at enormous financial benefits to gain a good amount of capital.
Let’s say 20 companies they invested in; there is a probability of only 1 or 2 growing this big. The ones that grow become the platform of returning their money and profit.
Dealing with them as a business owner is the best thing for you if you are financially unstable. However, it comes with its advantages and disadvantages, as explained below.
What are the Advantages?
Excellent Source of Expertise and Guidance
These investors do not invest in a field they know nothing entirely about it. If they lack complete knowledge, then be sure they know a bit. Apart from this, they are experts in the world of business startups.
Having such a backbone is very valuable for your company to grow. Bringing in such an investor brings crucial and relevant guidance and expertise to the table as well as additional resources. It can bring in a great amount of capital to your stake in your company for a small business in the early stage and so forth.
No Repayment Of Money
Unlike bank loans where you have to pay back the loan plus interest, money comes in free. So, as a business owner, you are not worried about how you will pay the money if your company fails.
It Provides Enough Funding and Exponential Growth
You cannot compare a startup that has enough money at its disposal and the one that has financial problems. These investors are a great source of financing that is badly needed by a firm starting up. Through these funds, a company has a high growth potential compared to its counterparts.
It Can Be a Source of Essential Connections and Other Resources
There is nothing as good as connections for a starting firm. It is through these networks that the probability of gaining a vast growth is possible. Working with them brings all this to your firm. These investors are prominent people who have helpful information and connections that can help a business take milestones.
They Are More Honest Than The Rest Of Private Investors
There are meagre chances of dealing with scrupulous venture capital. Regulatory bodies that check them are stringent. When working with them, therefore, you can be sure that they are following the rules.
The Disadvantages of venture capital
Short Redemption Time
Their number one to go to investment is a business that can assure returns after a short period from 3 to 5 years. For a business plan that may not meet this Return On Investment time, it may not work for them.
It Takes Long Before They Decide
It will take longer for these investors to decide if they want to invest in your firm, and this may present a significant setback. The mechanism involves high risk-taking; hence, they will take time to determine if your entrepreneurial talent is worth the risk.
Approaching Them May Be Difficult
Getting to talk to these investors, leave alone approval of your partnership, is a tedious process. Investors in this sector are always busy because they are in huge demand. Getting time for you may take a lot of effort on your side.
You May Lose Ownership And Control Of Your Firm
At all costs, these investors will protect their investment. Hence, they will actively interfere with the decision-making process to suit their interests. It leads to dilution of the powers held by the business owner.
They May Release The Requested Funds In Bits
The investors may agree to fund your startup, but they will not release the funds at once. Many of them require your business to be at a certain level before they can get you the money.