6 Advantages and Disadvantages of Venture Capital
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As with all types of funding, there are pros and cons to receiving VC funding.
Some of the biggest pros of venture capital funding are:
- Rapid business growth.
- Access to business expertise and extra resources.
- Valuable connections.
- No obligations to repay the money received.
The main cons of venture capital funding are:
- Loss of complete control over the company.
- Potential conflicts of interest.
Let’s analyze each one.
Pros of Venture Capital
The most significant benefit of getting venture capital funding is that it can help your company grow much faster than possible if you were to continue bootstrapping it.
Venture capital gives startups access to sums of money that would be very hard or even impossible to come by otherwise.
With all these funds available, early-stage businesses can hire new team members, rent office space, buy equipment, invest in marketing and advertising, and pay for whatever else is required for them to grow.
Expert Guidance and Additional Resources
Another huge benefit of making a deal with venture capitalists is that you get access to their business expertise and guidance, as well as additional resources they may have to offer, such as office space, equipment, or finance and legal teams.
Since venture capitalists make nothing if a company they back fail, they go above and beyond what’s required of them to assist startups in their portfolio and help ensure that they thrive.
For very early-stage companies, which sometimes only consist of the co-founders, this access to extra guidance and resources can be just as valuable as the venture capital funding they receive.
Venture capitalists typically have extensive networks of other investors, entrepreneurs, and business people in different industries.
They may be able to connect startup founders with potential team members, partners, and private investors.
No Repayment Required
Another considerable benefit of seeking out venture capital instead of taking a loan of some kind is that you are not obligated to pay it back if your company fails.
Although this is a huge risk to the venture capitalists themselves, it makes venture capital funding much less risky than other types of funding for those on the receiving end.
For comparison, a private business loan has to be paid back no matter what, with interest of about 3% to 7% on top of the initially borrowed sum.
Cons of Venture Capital
Loss of Control
Since VC firms always take some percentage of equity in a company in return for providing funding, it means that the founder or co-founders no longer have 100% control over their company.
Even if VC partners only hold a minority stake in your company, they will want to have some level of involvement in significant decision-making. They will also have certain rights outlined in the venture capital contract.
In fact, most VC deal contracts specify certain scenarios in which the venture capitalists have to agree with the company’s other stakeholders for them to make a decision, such as selling or acquiring assets.
The size of the stake given to a VC firm usually determines how much influence they have on the company. For instance, venture capitalists with a 30% stake will be much more involved than those with a 10% stake.
Conflicts of Interest
Another issue that can arise with venture capital funding is conflicts of interest.
For instance, unless there is something in the contract that says they can’t, the venture capital firm that backs your company might also be providing funding to a competitor, which can complicate things.