Owning a startup can be a daunting experience, no matter your niche. Survival can be difficult, and one study showed that 50 percent of companies fail within their first five years. There are many different reasons as to why these businesses do not succeed, and many are financial. Finding a venture capitalist can help you jump start your business without the burden of a loan; however, there are a few questions you may want to ask yourself before you accept this type of funding.
1. What is Venture Capital Financing?
Many small businesses that have the potential for rapid growth are offered venture financing. With this type of program, investors offer capital to the owner of a company in exchange for a certain amount of shares or partial control of the business. Many investors offer this financing if they believe the company has the ability to generate large returns.
2. Who Fronts the Money?
Venture capital is usually raised by investors and managers within the venture capital group. In most cases, the investors are looking for companies that are going to offer them hefty returns over a period of several years. Most individuals who take part in venture capital financing are looking for long-term investment opportunities within the small companies they originally finance.
3. Will My Business Change?
When you accept venture funding, you are selling a portion of your business to the person or people fronting the money. As such, you may be giving up partial control of the way you run your business. For example, if you accept venture funding from several different people and they become shareholders in your company, they may be able to vote on a variety of issues related to your company and even make drastic changes when they hold the majority.
This is one major factor to consider if you want your company to run a certain way and you want to continue to be involved in the daily decision-making process. The more venture funding you accept, the less control you may retain over your business.
4. Is Venture Funding a Loan?
Many small businesses are launched with the help of a traditional bank loan. However, some fail soon after because the company does not make enough profit to keep up with the loan payments. In contrast, venture capital financing is not a loan, but money fronted by investors who want to profit from a company they believe has the potential to be successful. If the business should fail, the investors lose their money.
5. Are There Any Risks for the Business Owner?
While much of the risk of venture capital financing falls on the investor, there are a few risks you may face as the business owner. For example, if the investors have a vision for the future of your business that does not match yours, they may move to vote you out or demote you to a position where you no longer have a say in the direction your company is moving.
If you want to accept venture capital financing, it is wise that you first understand the major differences between it and private equity. This can help you retain as much control as you wish over your company, even if you do decide to accept venture capital financing.
6. How Do I Find a Venture Capital Firm?
There are several well-known venture capital firms that offer financing to startup companies; however, in most cases, your business must be ready to grow and show some kind of early success before you are offered financing. It is a good idea to gather and print out profit data and other information about your business before you approach a venture capital firm. Decisions regarding funding are usually not made right away, but the more data you offer, the more informed the decision might be.
7. Is My Business Ready To Grow?
Some highly-successful venture capitalists, such as Mark Stevens, made their fortunes by gauging which small startups had major potential and funding them at the right time. While it can be difficult to know exactly when to plan a relaunch once you receive funding, you can consider a few factors, such as recent profits, new product plans, and what kind of resources you plan to purchase that can help your business grow.
If you believe your company is ready for a relaunch but your investors tell you there is still some more work to be done before venture capital is offered, try to keep an open mind and listen. Most venture capitalists have plenty of experience and are likely to realize when the time is right to make a move with your business.
8. What Can I Use the Funding For?
Venture capital can be used for a variety of business improvements, including the upgrade or purchase of machinery, office equipment, and the hiring of additional employees. Most investors do not impose limits on spending.
Venture capital funding can be helpful for any small business owner who is ready to move toward substantial long-term growth. Asking the right questions about this type of funding can help you grow your company with confidence and avoid errors caused by a lack of information.