October 28, 2019, 9:29 am

Venture Funding: Weighing the Pros and Cons

by: The Financial Blogger    Category: Investment, Market and Risk
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Venture capital financing sometimes allows small businesses to grow quickly, especially if they were successful early on. Many different types of companies use venture capital to expand, although not all are successful. This type of funding can be difficult to obtain, as it is not a loan and using it wisely may require some guidance; however, whether you are accepting venture capital or offering it, there are some pros and cons you may want to be aware of before you begin. 

Pro: You May Struggle Less 

When you accept venture capital, it can give you the means to cover expenses right away instead of having to depend on profit. As a result, you may struggle less when it comes to growing your company. You can purchase resources, pay vendors, and hire as many employees as you need without the burden of a bank loan or tightening your budget simply to meet these necessities. This may result in quicker company growth. 

Pro: Increased Networking 

Once you find venture capital financing, your investors will probably introduce you to other investors and people in his or her circle that may be interested in your company. This can help you build a network you can turn to when you need additional financing or want to reach out about finding new talent. The more individuals you have in your networking circle, the more potential resources you may have at your fingertips. 

Pro: Venture Capital Financing Is Not a Loan 

One major advantage of securing venture capital financing is that you do not have to pay any of the money back if your company fails to grow. This can have a variety of advantages for you as a business owner, including: 

  • No negative impact on your credit score 
  • No hefty interest fees 
  • No prequalification restrictions 

While your investors likely understand the risks of venture capital financing, it is wise to discuss all aspects of the process before you accept the funding, such as whether you plan to take your company to direct listing and which resources are needed for fast growth. This may help you and your investors maintain better communication, especially during periods of rapid expansion. 

Pro: You May Attract Better Talent 

Once you obtain financial backing via venture capital, you may be able to hire highly-qualified individuals and offer them the kind of salary that will keep them loyal to the company. This could result in reduced employee turnover and training costs, both of which can be a drain on company resources. Competitive salaries may also raise employee morale and maintain consistent quality control for product output and customer service. 

Con: Shareholder Interference 

Owning a business can be liberating, as you become your own boss and make all the major decisions regarding the operation and growth of your company. However, when you agree to accept venture capital financing, you are also allowing others to own a share of your business and perhaps take some control out of your hands. If this type of power shift concerns you, then accepting venture financing may not be the best choice and you might want to explore other options. 

Once you have more than several shareholders, they may vote to change certain aspects of your business and since majority rules, you may have to tolerate these changes. If you want to limit these actions, it is wise to do so when shareholders are first informed of their rights and limitations. 

Con: Investments Are High Risk 

While some individuals like Mark Stevens have made billions by investing in venture capital, being on the investment end does have its risks. A supported company may fail without warning, and since this capital is not loaned money, any investor in this position would stand to lose his or her investment. Some ventures might be riskier than others, but overall, investing in any startup this way may result in a financial loss. 

Cons: Your Salary May Be Reduced 

Receiving venture capital financing can allow you to purchase resources, hire talented workers, and obtain the tools and machinery you may need for growing your business. However, your shareholders may ask you to take a pay cut so financial resources can be spread through the company. If majority rules on a decision like this, you may find yourself with plenty of cash for the business but significantly less for yourself. 

Con: Venture Capital Can Be Difficult to Obtain

Venture capital financing has a variety of advantages that could give your startup a boost, but it is not something you can obtain easily. Many small companies are seeking this type of funding instead of opting for a traditional bank loan, so you may find the market crowded. Savvy networking may help you find an investor that suits your needs, but it may take months to work out a deal that is beneficial to you both. 

Venture capital financing has a number of pros and cons for both business owners and investors. Understanding the impact of these factors may help you make better investment choices, no matter which side you are playing.

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