Venture capital is money provided by an investor to small businesses and startups that have good growth potential. This is an essential funding source for many new businesses, including any online business, since most of them do not have access to capital markets. Even though it is an immense risk for the investor, it also represents good potential for highly profitable returns.
One of the biggest challenges that new entrepreneurs face when starting an online business is securing financial support. Some of them have already started working and need to expand their businesses, so this kind of financing is a great opportunity for them.
Advantages and disadvantages of raising venture capital
Lack of financial means is often the main obstacle between a great idea and a profitable business. Working with financial support such as venture capitalist funds or angel investors has some advantages and challenges, too.
Venture capitalist corporations are companies that make calculated investments in small businesses or startups that have a potential of becoming profitable. These companies typically specialize in investing a specific industry. Their funding may come with certain conditions that you may or may not be willing to agree to.
Angel investors also offer start-up financial funds, but these are often much lower than those from venture capitalist companies. They are either individuals or small capital groups and invest lower amounts of financial means. Angel investors do not impose as many conditions as venture capitalist companies do, but they also don’t provide you the expertise that venture capitalists do.
Both investment options involve some risks as well as rewards. When starting an online business there are some pros and cons that every entrepreneur should consider. Before you decide whether to raise such capital though investors for your online business or not, double-check your options and obligations to your potential investors.
Advantages of raising venture capital
Venture capital companies have large amounts of financial means and they are looking for good investment opportunities. Most of these companies, aside from the financial investment itself, offer their well prepared and experienced consultants to direct you through running your new business. They have access to a lot of information and relevant knowledge in your area of interest.
Due to their interest in seeing your business succeed, they will provide you with the best management support there is. They also maintain good relationships with other potential investors that may be beneficial to your business growth down the line.
Venture capitalist financial support is often much higher than the amount that you can get approved for by banks or other financing venues. You don’t have to ask your local bank for a loan. By raising venture capital for your online business, you exclude repayments of debt. Raising finances through venture capital allows you to worry less about your finances.
Your experienced team of investors will provide you with stability and help you focus on the big picture. When starting a new online business it is challenging to know what to look for when hiring employees for all the working positions you offer. Competent management teams are a high priority for venture capitalists, so they will provide support to you and help you recruit the best ones.
For most small businesses and and online startups it is common to be “unknown” to potential consumers. At first you do not have a well known, built-up brand. Things are different though when you gain credibility through your venture company. Your potential customers feel more confident doing business with you due to your reliable financial backing.
Disadvantages of raising venture capital
Although you are the person that founded your company, and you have the CEO title, you are obliged to answer to the board. Once you raise venture capital it’s not just “your company” anymore. The venture capital company will take a few board seats and the right to decide and control your firm’s capital. You will need their approval for any further business steps.
Your independence and control are now relative and limited based on how much cash you have accepted. Some investors may ask you for a great share of your company in exchange for a big amount of financial support. However, you should ask yourself if the offer is really acceptable and how you feel about losing you control to some level.
Venture capitalists have their own demands when investing in your company. Once you decide to take financial support from an outside source it is inevitable that you share your profit. You may face a drastic lowering of profits that your company may keep if it succeeds. Consider how much money your company will receive once all shares are paid.
Another crucial point is if the company’s stock value decreases, the venture capital company usually gets some stock for free. Also, they always get a rate of return which is guaranteed. A venture capital investor has a liquidation preference and gets principal and dividends before anyone else gets their share.
Venture capital companies reduce their investment risk by co-investing with other companies. Differences in opinions do happen and personal interests often prevail. Balancing your interests with the ones of the venture capital company can be a full-time job for you or anyone in the chief executive position.
When asking a venture investor to invest in your start-up online business, you should be prepared to wait. They do their own market research, so it can take more than three or four months before they decide.
The final decision about your online business…
Venture capital funds are mostly used by companies that don’t have an acceptable enough operating history to qualify for bank loans. You’ve developed your product/service and you’re ready to start your new adventure with an online business. The only thing missing is enough capital to get started and keep growing.
Should you raise venture capital for your online business? There is no right or wrong answer. Venture capital funds are not easy to get. There is always the chance that you’ll be turned down by these investment companies. There are some positives, as well as negatives to both options. If you choose venture capital, at least try to understand what the stakes are.
If you choose to raise venture capital you should do your best to get it. Prepare financial projections, presentations, and try to make your proposal more compelling. Then, you’ll have to contact several venture capitalist companies that do investment in your industry and hope to make your vision a reality.