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  • How to Finance Your Business Growth
    Game Plan
    In-Depth

    Advantages vs. Disadvantages of Venture Capital

    AdvantagesAdvantages

    advantages

    • Business expertise. Aside from the financial backing, obtaining venture capital financing can provide a start-up or young business with a valuable source of guidance and consultation. This can help with a variety of business decisions, including financial management and human resource management. Making better decisions in these key areas can be vitally important as your business grows.
    • Additional resources. In a number of critical areas, including legal, tax and personnel matters, a VC firm can provide active support, all the more important at a key stage in the growth of a young company. Faster growth and greater success are two potential key benefits.
    • Connections. Venture capitalists are typically well connected in the business community. Tapping into these connections could have tremendous benefits.
    DisadvantagesDisadvantages

    disadvantages

    • Loss of control. The drawbacks associated with equity financing in general can be compounded with venture capital financing. You could think of it as equity financing on steroids. With a large injection of cash and professional—and possibly aggressive—investors, it is likely that your VC partners will want to be involved. The size of their stake could determine how much say they have in shaping your company’s direction.
    • Minority ownership status. Depending on the size of the VC firm’s stake in your company, which could be more than 50%, you could lose management control. Essentially, you could be giving up ownership of your own business.

    Bottom line: Would you rather own your own business or partner in a larger, potentially more successful one?

    Deciding FactorDeciding Factor

    deciding factor

    • Are you open to more active input from a venture capital firm?
    • Do you appreciate the additional expertise and resources a VC firm could provide?
    • Is loss of ownership and control an issue for you?
    • Could you gain through a VC firm’s business connections?
    • If you lack experience and could appreciate the additional support, a VC arrangement might work for you.

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    Game PlanGame Plan

    Game Plan

    Next steps:

    • Read about venture capital at the U.S. Small Business Administration.
    • Prepare a business plan and your financial statements.
    • Consult with a financial advisor, banker and/or an attorney, or a fellow business owner for advice and a possible introduction to a venture capital firm.