Venture Capital Advantages & Disadvantages: An Asset or Liability?

Posted On May 12, 2020

Venture Capital

Startups and SMEs need cash injections to propel their business to the next level of success. Traditional means of financing, such as bank loans, can be complex, time-consuming and run the risk of leaving entrepreneurs in great debt. Alternative sources of financing open up opportunities for expansion and huge returns. Here enters, Venture Capital. 

Venture capital (VC) as a source of investment is usually attainable to businesses with proven success and a relatively profitable business model. VC generally comes from well-off investors or investment banks who see long term growth potential in small companies. The goal is to see a high return on investment, often in the form of an acquisition or IPO.

Not all investments will generate tasty returns. For every 20 investments, a VC makes, only one will likely be a huge win. That’s why VCs go big. They’ve got to invest in companies promising giant outcomes. And lot’s of them at that. The big returns help to cover the losses of the high number of fruitless investments. It’s a high risk, but they keep going in search of the next Google. 

To venture backed companies

(Top venture-backed companies. Image: Statista)

It’s no surprise that Venture Capitalists gravitate toward particular trends and industries that are most likely to yield big returns. It’s not uncommon to see much VC investment in technology companies since they have the potential to be massively profitable on grand scales.

Can VC investment be an asset to your business and its growth?

In short, yes. But there’s more to it.

Source of cash 

It’s an obvious one but a good one. VC’s are an immediate source of financing and rapid growth. The movement you close a deal with a Venture capitalist, you can begin to put their cash to good use. Such access to large amounts of capital can help your startup to grow faster and scale up in ways that would have been impossible without the extra cash.

You don’t have to repay the money 

Unlike traditional loans and borrowing, you’re under no obligation to pay back the money you raise. In fact, all monetary risks are on the VC themselves. If your startup fails, and the majority of them do, you’ll never be left with a bill for thousands or millions of dollars.

Industry and startup knowledge 

Venture capitalists can provide guidance and expertise. In many startup cases, founders will often have to do multiple jobs at once, learn on the job and juggle between different areas of business. A startup may have been founded by a designer, but that designer suddenly has to become a marketer, accountant and communications specialist.  

One of the biggest advantages of working with a VC is that they usually invest in areas that they are extremely knowledgeable about. In the cases where they aren’t experts in your field, you can rest assured that they understand the startup ecosystem better than anyone. Along with their cash injection, they’ll come along with all their institutional knowledge- a truly invaluable asset to your company.

VC’s come with all the connections

In addition to their cash investment, their own knowledge and expertise, VC’s can connect startups with additional resources, connections and hiring. Essentially, they bring their entire nurtured and extensive network to the table. There’s a good chance your VC will know other investors and potential customers your startup can partner with. 

There are few unscrupulous VCs out there

Thanks to a number of regulatory bodies and their strict supervision over venture capital activity, you can be more sure that your VC is playing by the rules. There are plenty of shady alternative private investors but less so with VC.

Getting a hold of a VC is easy 

Unlike angel investors who are notoriously difficult to find, venture capital firms market themselves openly. They want to be found and they want to find you. As noted previously, VCs look for high-quality investment opportunities, but also a high number of them. You can literally use any search engine to find “venture capitalist firms” and find them in abundance.

Getting their attention is another story, however. But that brings us nicely onto our next section; is it possible that VCs are more of a hindrance than a help?

Can VCs be a liability to your business?

In short, yes they can! 

Loss of control 

Ultimately, when you take on a VC, you’re trading equity for their funding. In other words, you could be losing a significant portion of your autonomy within your company. Despite not having to ‘payback’ the money you raise through VC, you’re technically paying for it.

VC’s will also expect a say in how the business is run. This is understandable since they will want their investment to be protected. If their perspective on the startup doesn’t match yours, things could get complicated. Enter into the deal with the understanding that you probably won’t retain 100% of the say in the running of your startup. 

Risk of losing ownership 

Be prepared to hand over at least some shares of your company to your VC. Understand that you also run the risk of your investors gaining more shares than you and your co-founders, meaning it becomes possible to lose ownership of your company. These factors should be considered the moment you begin to contemplate bringing on a Venture Capitalist.

It’s not uncommon for your VC to add a VC-tied member to your team. This member ultimately answers to them and is a proven way for VCs to protect their investment. Once again, this poses another factor to take into account before you take VC money.

Negotiating legal terms 

Some startups, whilst working on preliminary and unpatented products and intellectual intelligence may prefer to stay under the radar to prohibit competitors swooping in on their business model. In these cases, it’s standard to have all those involved sign an NDA after they have information on your startup. Not all VCs are willing to do so. As such, they instantaneously become huge liabilities and subsequent threats to the long term success of your startup. Ensure your VC partner understands the terms of your own conditions before closing the deal.

Time-lags can set your business back 

VCs are naturally all about high risk and high reward. At the same time, due to risk, they may be more cautious and take a longer time to decide to invest. The process of raising VC capital can be a gruelling one. Whilst it can be an incredibly useful pool of funds once it’s there, some founders have to tap out before they’re able to raise funds. The period between finding a Venture Capitalist and getting to splash the cash can be a serious disadvantage to VC.

Once you finally seal the deal; VCs are well within their rights to refrain from releasing all funds upfront. Many will choose to release it over a set and agreed period of time. Some contracts will even have certain clauses about your startup meeting certain metrics before the next round of funding. In essence, VC isn’t as glorious and simple as getting cash and expert advice for free.

In short, VC funding isn’t all cash and happy days. It takes hard work and dedication to make efficient use of a venture capitalists investment of cash, knowledge and time. Once you understand the pitfalls, it remains clear that VCs come with the capacity to skyrocket your startup.

Written by Daglar Cizmeci
Investor, Founder and CEO with over 20 years’ industry experience in aviation, logistics, finance and tech. Chairman at ACT Airlines, myTechnic and Mesmerise VR. CEO at Red Carpet Capital and Eastern Harmony. Co-Founder of Marsfields, ARQ and Repeat App.

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