The major Decision to make when raising Capital for your Business is whether to use Debt or Equity financing. Venture Capital falls under the category of Equity financing, which is very different from debt (i.e Bank Loans).
Venture capitalists look for start-ups and fast growing companies with high potential of being acquired or going public (IPO) within a few years.
Raising venture capital also involves a lot of work. As the entrepreneur, you will ll have to prepare exhaustive business plans with financial projections, valuation, pitch deck presentation, etc.
In addition, raising equity capital, means that you’re selling a portion of your company. Thus, you will give up ownership in return for funding.
However, it is important to note that owning a small piece of a big company is better than a large piece of a small company. For example, a 10% share of a $10 million company is twice as valuable as 100% share of a $500,000 company.
Moreover, raising venture capital lets you to focus on growing your business without having to worry about liquidity and short term payables. As you do not have to pay any interest or principal, which Bank Loan requires.
- Business expertise. Venture Capitalists provides a valuable source of guidance and consultation.
- Connections. VCs are very well connected in the business community.
- The ability to scale quickly. Capital funding makes it possible to take things to the next level
- Loss of control & Minority Ownership status. VCs get involved in the executive management of the company; and depending on the size of the VC’s share in the company, which could be more than 50%.
- Misaligned goals and priorities.Different management opinions may lead to declines in efficiency, and could also create hostile working environment