Advantages vs. Disadvantages of Venture Capital

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Advantages
  • Business expertise. Aside from the financial backing, obtaining venture capital financing can provide a start-up or young business with a valuable source of guidance and consultation. This can help with a variety of business decisions, including financial management and human resource management. Making better decisions in these key areas can be vitally important as your business grows.
  • Additional resources. In a number of critical areas, including legal, tax and personnel matters, a VC firm can provide active support, all the more important at a key stage in the growth of a young company. Faster growth and greater success are two potential key benefits.
  • Connections. Venture capitalists are typically well connected in the business community. Tapping into these connections could have tremendous benefits.
Disadvantages
  • Loss of control. The drawbacks associated with equity financing in general can be compounded with venture capital financing. You could think of it as equity financing on steroids. With a large injection of cash and professional – and possibly aggressive – investors, it is likely that your VC partners will want to be involved. The size of their stake could determine how much say they have in shaping your company’s direction.
  • Minority ownership status. Depending on the size of the VC firm’s stake in your company, which could be more than 50%, you could lose management control. Essentially, you could be giving up ownership of your own business.
Bottom line: Would you rather own your own business or partner in a larger, potentially more successful one?
Deciding Factor
  • Are you open to more active input from a venture capital firm?
  • Do you appreciate the additional expertise and resources a VC firm could provide?
  • Is loss of ownership and control an issue for you?
  • Could you gain through a VC firm’s business connections?
  • If you lack experience and could appreciate the additional support, a VC arrangement might work for you.

Game Plan

Next steps:
 
  • Read about venture capital at the U.S. Small Business Administration.
  • Prepare a business plan and your financial statements.
  • Consult with a financial advisor, banker and/or an attorney, or a fellow business owner for advice and a possible introduction to a venture capital firm.
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