Venture Capitals – The Main Advantages and Disadvantages
Attaining a good amount of funding to kick-start a new project or business proposition can provide you with the much-needed resources to ensure that you build your business on a proper foundation. It also makes sure that you are motivated enough to see the project to fruition.
However, there is another school of thought who believes that taking money from strangers in the form of a venture capital or angel investment is something that comes with its own fair share of cons. In this article, we will be discussing the various venture capital advantages and disadvantages to better understand the situation surrounding it as a whole, in the end deciding whether or not it is a beneficial action.
Advantage: An Instant Supply of Money
Gaining a hefty sum of money from your investors is a great way to ensure that the foundations of your business are set well. Making sure that all of your business needs are met when your business or company is initiated can ensure that you do not run into problems any time in the near future.
However, one thing to note is that a venture capital given to you is basically the investor gambling on the success of your business. If the business fails to reach the expectations of the investor, then not only will it fail you, but the investor too. Although this is never the desired outcome, at least it comes with the consolation that you are under no obligation to pay the money back to the investor if the business fails.
Contrary to taking loans from a bank that would hover over your mind like a dark cloud if you were unable to repay them, investments given through venture capital do not need to be returned.
Advantage: Provides Noticeable Growth in a Business
By attaining a venture capital from an investor, a business is able to begin its development process and with the newly acquired resources on their side; this development can be quick and efficient with a hefty loan. If the investor is a well-known personality, they might drive in additional attention and traction towards the business which will only further the benefits that the business will acquire by attaining the capital.
Without the barriers that come with a limited amount of funds, businesses can be more free-handed and creative in their decision-making process, and are able to experiment and try out a number of strategies to discover what works best for their business. This would not have been possible if they were in constant fear of running out of funds.
Disadvantage: Investors Own a Share of the Company
As mentioned above, if the business or company does not do well, they are under no obligation to pay the investor back. However, that doesn’t change the fact that the investor still has a share in the company, and any money that one does earn from that point on will have an asterisk attached to it.
Investors require equity in your company in exchange for the money they provide. Thus, in the case that the business does end up doing well, you will simply not be done with the investor by returning the amount they provided originally, with additional interest. Instead, they will receive a percentage of the money earned and will also have the ability to control and change certain aspects of the company.
Disadvantage: Finding an Investor Can Be Difficult
Finding an investor can be a difficult task. Most business owners will have to try many different strategies to ensure that they get an investor on their side. They will all have to keep in mind that many investors will demand a hefty equity to even consider giving money to the business.
To pique the interests of an investor, many business owners will have to change their game-plan and pitch to better suit the requirements and expectations of the investor. This might make it so that they deviate from their core values or missions that they originally set out with. When this happens, a business begins to lose its identity and is directed more by the person investing instead of the people actually working and developing it.
As stated above, by holding a stake or share in your company, investors are basically able to control important aspects of your company, something that might result in friction in the future. If you wish to take a certain route that your investors believe is not the best course of action, then you might be inclined to search for an alternative path.
Take-Home Message
While there are certainly many factors to discuss when it comes to venture capital advantages and disadvantages, it is quite evident that the choice isn’t always clear-cut. Making an informed decision about whether or not to get an investment depending on the unique needs and requirements of the business is always better than following a prescribed option.
