Entrepreneurs who have built up a successful business and want to take it to the next level, seek financing for their startup from venture capital (VC) firms.
These firms give capital; provide strategic help; acquaintances with potential customers, partners, and much more. This sounds fascinating, but before choosing to take venture capital funding, make sure to weigh the pros and cons cautiously.
Continue reading this blog to know—Is the venture capital process right for your startup?
What is Venture Capital?
Venture capital is commonly given in the form of equity investments in your business. It is a type of financing that can be obtained through investors. These investors prefer to invest in startups and companies of industries with which they are familiar, those that they think will have long-term growth potential, and from whom they will get a good return on their investment.
The sources of venture capital will look at your business plan to check if it has potential and is a plan worth investing in. Before making a decision, they will vet your business and do their due diligence.
They normally have a long-term investment assessment and are set up to be patient as you develop your business. For some markets, it is crucial to get extra financing from outside sources except if there is a lot of money to work with, which is the thing that makes venture capital funding a great option.
In return for the investment, the investors seek a stake in the company. That implies that they get a say in the company’s decision-making. The risk may be higher for investors but the potential for above-average returns is the thing that is alluring.
The main sources of venture capital are:
- Financial institutions
- Investment banks
- Individual investors with a lot of money
- Other types of partnerships
Venture Capital Process
When you find venture capital for your startup or small business, it is imperative to have knowledge of the process so you can be successful.
Step 1: Make a Business Plan
The initial step that you should take is to make a business plan. A business plan is a pivotal part because, without it, your startup or small company will probably not be considered.
Prepare a precisely detailed business plan and make sure to include the following points:
- The business description
- How will you profit?
- What is your market and pricing strategy?
- What specific attributes do you have that your competitors don’t?
- How will you position your business?
The business plan should be very thorough so that it can be used to persuade a venture capitalist to invest in your startup. You can refer to the business model canvas to know what components are necessary to include in a business plan. A well-articulated and structured business plan appeals to the investors.
Step 2: Hold a 1-On-1 Meeting
When the fundamental vetting is finished by the VC and they find the venture according to their preferences, there is a 1-on-1 meeting that is called for discussing the undertaking in detail.
After the 1-on-1 meetings the VC, at last, decides whether or not to go ahead to the due diligence phase of the process.
Step 3: Review Relevant Documents
The due diligence phase differs for every startup depending upon the type of business proposal.
This process includes a review of a company’s finances, potential, and present litigation and solves questions related to product and business strategy assessments, customer references, and all other relevant business activities.
This process includes sharing the sensitive information of the company concerning its financials, activities, finances, legitimate, and other administrative data. Thus the parties sign a Non-Disclosure Agreement (NDA) before the beginning of the due diligence process.
Step 4: Check Terms and Conditions
The VC offers a term sheet if the due diligence phase is palatable. It is a non-binding document explaining the basic terms and conditions of the investment agreement.
The term sheet is by and large negotiable and all parties must agree to it. After everyone agrees to terms and conditions legal documents and legal due diligence is completed, then funds are made available.
Benefits of Venture Capital Funding
Venture capital funding brings in many benefits for your business.
Below are the few benefits that you can have through the process:
Many startups and new businesses have benefited from this.
It financially backs companies in their initial stage and helps them to get off the ground. Furthermore, it tends to be hard to grow at the desired rate. With financial backing, it is easier to put your business plan into overdrive.
The major advantage of tapping venture capital funding is that you not only get the money that you need but gain access to their existing expertise in the industry.
You also get guidance and consultation on business decisions with the goal that you can do the best for your startup. This kind of help stops you from making the same mistakes that they did when they were starting their business. This involves financial management decisions so that you can use the money more carefully than you would do all alone. This is an essential part of your business growth.
The Network of Connections
With the correct member in your group, you will get access to their network of connections.
Building connections in an industry is priceless. You can acquire significantly more from these connections and you should use them for your potential benefit.
Another positive about going venture capital funding is that you can gain so many other resources and use them to your advantage. These resources include assets for lawful issues, tax matters, and even staff matters. You will get constant support for this from venture capital firms. These resources will help you to accomplish your desired business growth.
Disadvantages of Venture Capital Financing
Indeed, even with a ton of benefits that you can have, there are likewise a few disadvantages to consider before you decide to take this route. These are the primary ones to consider:
You May Fail to Keep Control of the Startup
You may find that a few investors need to have a greater stake in the company depending upon the investment they did in it.
If you are not cautious, regardless of whether they don’t own more than you, they could flee with the startup, particularly in the event that they are forceful. You will need to keep as significant a part of the startup as possible and stand firm if they start to entirely alter the course of your startup.
You Risk Turning Into a Minority Owner
Another drawback is that if the VC firm or investors may decide that they need a huge part of your startup—50% or more—you could turn into a minority owner.
This implies that you would no longer own your startup totally and you would not have the final decision-making power in any issues. Venture capital firms likely have their ideas regarding how to run your business. Since you are taking capital from them, you will have to countenance their ideas as well.
Before you take a venture capital fund, it is important to negotiate how much state the firm will have in your business decision.
Whether Venture Capital Is Right for Your Startup or Not?
When you have to decide whether venture capital is right for your startup, you should be exceptionally careful in your assessment. You have to consider whether you would be open to the active input of an investor. If you figure that you won’t be open to any input or recommendations, then this is not the right process for you. You should also consider whether you would approve of losing a part of the responsibility of your startup. To come to an agreement with the inventors, you will have to give some of the startup stakes to the investors.
At the same time, the resources and business expertise provided by venture capital firms will benefit you to grow your startup and take it to the next level. Venture capitalists are shrewd investors and generally have a long-term horizon. Considering these points, the venture capital process is a great choice to go ahead with.
With regard to venture capital, you need to decide if you would prefer to possess your business entirely or you want to have a bigger and more successful business that you are not the sole owner of however will be greater and better subsequently.
Ella Brooks, a Business Analyst at SunHR. She has expertise in Business Growth Strategy, Business Intelligence and writes on topics related to it to help startups and small businesses grow. Also, she is a member of the investment advisor team at Alcor Fund, a global investment bank. She has an interest in artificial intelligence.