Startup companies need money. There are several different approaches for raising funds to get your business off the ground.
One of those options is VC funding.
Depending on your situation, this can be a great choice. But not every startup can benefit from VC funding.
That was the inspiration behind this resource. I want to clear up any misconceptions about VC funding, so you can decide if this is the best way to get your startup funded.
I’ll explain the concepts of VC funding, go over its benefits, and tell you about the downsides as well. This will make your decision much easier.
What is Venture Capital?
Let’s start with the basics. Venture Capital is a type of financing.
Investors provide funds to startups and small businesses in exchange for equity in the company.
This type of funding is growing in startups because at times, it can be easier to raise money from a VC as opposed to a bank or traditional lender.
But there are some misconceptions about VC funding and how it works. First, just because you get funded by a venture capitalist, it doesn’t automatically mean that your company is going to grow at an accelerated rate.
Furthermore, not every VC investor is going to restrict your entrepreneurial pursuit. Are there some VCs out there that aren’t so pleasant? Sure. But for the most part, VCs are willing and able to help your business.
Benefits of VC Funding
There is lots of upside to using venture capital to fund your startup. I’ll go through the top benefits, so you have a better understanding of them.
It may sound obvious, but the money that you’ll get from a venture capitalist is a top benefit.
Most startups don’t realize exactly how much money they can potentially get from this type of investor. According to Statista, the median deal size of VC-backed company in 2018 ranged from $1.1 million to $11.5 million, depending on the stage the business was in.
That’s significantly more than you’ll get from a bank. In fact, the average small business bank loan ranges between $130,000 and $140,000.
Plus, with VC funding you won’t be paying interest on the money raised.
So, it’s a great option for those of you who need large sums of cash and can’t secure the amount from a bank or traditional lender.
As I said before, accelerated growth isn’t guaranteed with VC funding.
However, the initial cash injection into the business will usually be enough to get your startup off the ground.
So, if you’re starting from scratch, an investment can help you buy equipment, purchase inventory, and get anything else you need to jump start your growing business.
While it’s still up to you to make smart business decisions, the lump sum of the investment will set you up for success, making it much easier for your startup to grow.
With enough funds in the bank, you won’t have to worry about being able to keep the lights on at your office or pay the rest of your bills.
That stability from cash in the bank gives you more room to operate and run your startup.
You’ll be able to spend more time on your business, as opposed to spending time with lenders trying to secure a loan, or asking your vendors for extensions on your payables.
If you get VC funding, a bad week or a low sales month won’t put you out of business.
VCs typically have extensive experience within industries that they invest in. This means that they have lots of powerful connections.
They can put you in contact with top-level talent and resources that would normally be unobtainable for a startup.
A VC can pick up the phone and get you an appointment with people who may not otherwise take your call. This gives your startup a huge advantage and opportunity for growth.
It’s a misconception that when a VC comes on board, they start controlling every decision.
Unless they’ve invested a massive amount of money and taken majority ownership of the company, their investment won’t get extra board seats or the ability to make final decisions.
However, their experience should still be taken into consideration if they make a recommendation. VCs are used to working with startups, and they probably have experience working with companies like yours in the past.
Just being your bankroll isn’t always the solution to every problem. A VC can offer valuable guidance when you’re faced with tough times.
Securing a venture capitalist investment can be huge for a startup’s image.
You could gain attention from media outlets or other people in your industry. VC funding comes with a sense of validation for your business model and a certain level of prestige as well.
All of this gets your name out there so customers will know who you are.
If a big-name VC is backing your startup, it tells people that your product or service must be great. Whether that’s true or not, this is the perception that others will have.
Downsides of VC Funding
While VC funding has tons of upside, it’s not perfect. There are some other factors that you need to take into consideration.
First, you’re going to lose some ownership in your company. Depending on the size of the investment and the valuation of your startup, the equity will likely range somewhere between 5-50%. At times, it could be even higher.
Giving up too much equity in your company could put you at risk of losing ownership. If that happens, you’ll also lose power and final say in decision making.
So, just be aware of this before you agree to terms that you’re uncomfortable with.
You also need to make sure that you’re appropriately allocating the VC funds. If you’re using that money to meet payroll, it’s just a temporary solution to a larger problem. But when the money runs out and you fail to meet payroll again, then you’re back in a compromising position.
So, make sure that the funds you’re raising have a clear purpose. Know how you’re going to use the money to improve your business.
Taking money from a VC can be stressful. You might feel added pressure to make sure that your VC gets a return on their investment.
You also want to make sure that the time you spend trying to raise money from VCs doesn’t take away from your actual business. Don’t fall behind your competitors because you spent a year trying to get funded as opposed to improving your product or service.
If your startup needs money, VC funding is a viable option.
As you’ve learned from this guide, there are lots of benefits of using venture capital for your startup. However, there are also a few downsides that need to be taken into consideration before you decide.
CFOs have connections to investors and VCs. Their expertise can help you determine if VC funding is best for your startup, or if you should look for an alternative option.