Startups need funding. Even the best idea can’t get off the ground if there isn’t money behind it. The problem is that startups often lack a wealth of easy cash resources to tap into.
Banks rarely lend to them due to their ideas being unproven. Friends and family often don’t have the cash needed to bring a startup to fruition. Pretty much the only funding available to these startups will be venture capital.
Venture capital comes from investors that are fearless in taking a huge risk. In their minds, the risk is more than worth any rewards they could get their hands on. It isn’t a surprise, really. Some venture capitalists have become millionaires, sometimes billionaires, off the back of their investments.
Ari Stiegler, CEO and co-founder of Prism and Managing Partner of Flux Capital, has been responsible for helping businesses secure over $200 million in venture capital, with that figure rising every single year. Ari Stiegler is the type of person that loves to help the best startup ideas get off the ground. However, even he knows that venture capital isn’t for everybody. As with everything, there are pros and cons to venture capital.
The Pros of Venture Capital
Let’s start with the advantages of venture capital. These are the reasons why you may want to consider getting venture capital into your business. These advantages are the main ‘selling’ point for people like Ari Stiegler.
Cash For the Business
For many, this is the main advantage of venture capital: huge sums of cash brought into the business. Cash can be used for growth and to fund much-needed operations. This capital often allows startup founders to come in and start working full-time on the business. When founders are able to dedicate their time to the business, there is a much greater chance of success.
The amount of cash will vary depending on the needs of the business. When most people think of startup venture capital, they believe the investments are millions of dollars. They aren’t. Most investments will be in thousands to hundreds of thousands of dollars. Remember, venture capital firms are risk-takers. They are likely to hand over more cash than any other source.
This doesn’t apply to all venture capital. A startup founder would need to discuss this with the venture capital firm. However, most venture capitalists see venture capital as an investment. They are expecting no repayments on the cash.
Their repayments come from the future value of the company. This means that the startup can focus much more on growth than on trying to meet repayments every month.
Venture capitalists are experienced in business. Many of them have run startups themselves. Ari Stiegler, for instance, founded TutorMe, which Zovio eventually purchased for vast sums of cash. He now helps to fund startups every day.
These people have experience, and most people that start a business don’t have experience. They are trying to navigate a process that seems completely foreign. A venture capital provider can help guide startups through business pitfalls and steer them toward opportunities. This can lead to a greater chance of success.
Access to Key Staff
Many venture capital firms will provide access to lawyers, accountants, and other key staff members. This means that a startup won’t need to spend a ton of cash on employees or team members they don’t really need quite yet.
Venture capitalists have spent years working on building up connections through a variety of businesses. Venture capitalists want to make money, so when they invest in a startup, they will put people in touch with their connections. This can lead to quicker growth.
We have touched upon this a lot already. However, investment means growth. Companies grow faster when they have cash.
The Cons of Venture Capital
While the potential advantages of venture capital may seem great, there are a few downsides.
Loss of Business Ownership
Venture capital firms are not handing out money for free. Their hope is that they get their cash back later on. When they invest in a company, they buy shares in the business. Each share sold is a slight loss of control.
When many venture capital firms start getting involved, startup founders may find that they don’t have much control over their business. Some may even sell enough shares to bring them down to a minority stake.
Sure, it is excellent for short-term cash flow, but venture capital may not be brilliant for those wanting to make a lot of cash from their business. Although, one could reasonably argue that these businesses probably wouldn’t be making a lot of cash without that investment.
Takes a While to Find the Right Venture Capitalist
There are a lot of venture capital firms out there. Some are great, others not quite so much. Finding the right venture capital firm for your business idea can take a lot of time. This is where people like Ari Stiegler come in useful. They have the talent to find the right investors for a business.
Of course, each minute spent trying to track down a venture capital firm is a minute that isn’t spent on developing the business in other ways.
You Can’t Change Your Mind
Once you have signed a contract and received your funding, there is no going back. You can’t regain control of your shares. You can’t get rid of the venture capital firm if you don’t get on with them. It is possible, but it would likely cost a lot of money. Many startup founders have found themselves with the wrong venture capital firm, and it causes them to lose motivation with the whole business idea.
Venture Capital Firms Have High Standards
We have made it seem like venture capital firms will break down your door to invest in the business. They won’t. Studies suggest that just 1 in every 2000 businesses that seek funding will receive funding. If you do not have an impeccable idea, then you will never find a venture capital firm that wants to work with you.
If you do find an investor, they will be constantly pushing you, harder than you have ever been pushed in your life. It can be tough sometimes, but they want to get their investment back. The only way to ensure their investment comes back is a having a successful business. Some founders don’t like this. Before they receive startup capital, they are more relaxed about their business. When they bring another person in? It gets demotivating. They may disagree with the working style.
Venture Capital – Is It Right For You?
It is tough to know whether venture capital may be for you. You will have to weigh up the pros and cons yourself. For every business that would benefit from venture capital, there are thousands that probably wouldn’t.
Tech startups may wish to reach out to somebody like Ari Stiegler. He has the knowledge to help people to decide whether venture capital is right for the future of their business.
Interesting Related Article: “Venture Capital: What You Need to Know About It“