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Should Your Startup Seek Venture Capital Funding? Here are Some Things to Consider

January 17, 2017

 

Venture capital ("VC") firms can provide business expertise, additional resources, and connections. When it comes down to it, accepting VC funding is a high risk, high reward choice that needs to be considered thoroughly. Why, then, might VC funding not make sense for some startups?

 

Well, first, you need to consider the advantages that a VC firm can offer.

 

1. A Major Infusion of Capital

 

This is an obvious aspect that many startup founders tend to zero in on, without carefully considering other important aspects. At the most basic level, VC funding simply provides startups sustenance--a lifeline for the company to continue paying salaries, bills, vendors, and creditors while the company grows towards profitability. Moreover, VC money means additional resources to acquire new talent, continue to develop products and services, and break into new markets.

 

2. VC Partners Will Always be Highly Motivated to Connect you to new Markets and Investors

 

In addition to the initial financial infusion that your VC partners will provide, more financing/investing opportunities will arise as a result of your connection with your new partners. They will literally be invested in your success, as their fortunes are now tied up with yours and you really are "partners," and they will be motivated to use their connections and leverage to get your company into new markets and potentially in front of other investors. Even without this direct influence, there will be other investors and influencers that will see you are connected in a very tangible way with VC partners and may be inspired to get in on the action as well.

 

 

3. “Free” Advice and Guidance from Your VC Partners

 

 

 

Your new VC partners will be incentivized to provide you with all of the “free” business advice and direction to you as possible to help guide you and your company towards profitability and growth as soon as possible. Not all of this advice and direction will be in 100% accord with your vision for the business (see “You Will Now Have Someone to Answer To” below), but many VC investors have been around the block a time or two with respect to making businesses succeed, so be sure to take as much as you can from this relationship. 

 

The Disadvantages of Taking Venture Capital Money

 

1. Dilution
 

Your company's vision may have been your “baby” for years, but when you bring in VC partners, you will own a diluted part of that baby going forward. The amount of dilution of course depends on the terms of the deal you negotiate, but remember that your VC partners, no matter how much they love your ideas, got into this business to make a lot of money, and that is what they are expecting to take from your company. Your portion of the company’s profits will likely go way down, and your ability to control the direction of the company through shareholder voting will go down as well.

 

2. You Will Now Have Someone to Answer To
 

Bringing in VC partners will likely initiate major changes in the way your company is run, as, in many ways, it will no longer be “your company.” This shift in power structure will likely affect all aspects of business, from the way your products and/or services are developed and marketed to who you can and can’t hire or what the future and direction of the company culture and ethos might be.

 

3. Pressure to Exit
 

Your VC partners may love your company and the future profits it may bring, but they may rather see you without any control of the company. Many VC firms have an overarching goal of either selling the company in an M&A deal or taking the company public in an initial public offering. In either case, your future with your business is uncertain, and, frankly, you may not even last that long if they have other short-term goals in mind for the business.

 

Whether or not to accept VC funding is entirely your decision, so choose wisely!

 

As you can see from the above, the decision to accept VC money may be the single greatest choice you can make for the long-term success of your company, but it may well be the last decision you ever get to unilaterally make on behalf of your company.

 

 

© 2017 Dallas P. Verhagen — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

 

 

 

 

 

 

 

 

 

 

 

 

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