Risks and Rewards for Start-Ups seeking Venture Capital
For start-up businesses, venture capital (VC) investment represents an opportunity to obtain financing, strategic advice and access to potential markets at the outset of their business venture. Funding of this nature is becoming increasingly popular, and often necessary for start-ups who lack access to loans, capital markets or other traditional sources of finance.
Investments in start-ups are high-risk, high-reward. VC firms are poised to win big if their investment pays off but, because of the inherently precarious nature of many new businesses, they will often be eager to have a hand in controlling the decisions and activities of the new enterprise.
We look at some of the risks and rewards of VC for start-ups, as well as issues to bear in mind if you decide that VC is the right option for you.
The most obvious benefit of venture capital is precisely that: capital. VC can represent a significant injection of money that can often be decisive in a start-up’s capacity to enter the market as a genuine competitor. This can help start-ups realise their goals much faster, and potentially beat other competitors to the market. What’s more, the money is yours. You are not bound to repay them (as you would be with a lender) which can court
educe the immediate cash-flow pressure.
Other benefits include access to a wealth of business experience, mentoring and networks. The expertise of a large and sophisticated VC firm can be immeasurably valuable as you start out on your new venture. The investors have a vested interest in the growth of your business, and will be able to assist you wpith managing your business and developing your skills as an entrepreneur. It will also often mean access to additional resources to assist with your business’ growth, with the VC firm often willing to provide-or at the very least facilitate access to-legal, advisory, tax and other support. Start-ups are often able to leverage the well-established connections that their investors have within the industry, including with other potential investors, potential clients and others key stakeholders that can help push your business ahead within the market.
The key risk is the loss of control over the business. Naturally, investors with a lot to lose will want to have a hand in the decisions of the business they’re backing. A corollary of seeking VC investment is that start-ups will usually have to relinquish a significant degree of control in their companies. VC firms will often negotiate seats on the board, priority shareholding, and significant stakes in the business that allow them to influence, veto or even make key decisions. You may even be relegated to minority ownership status. This shift in the ownership dynamic can be problematic where your goals, priorities and values are misaligned with those of your investor.
A related problem is the counter intuitive issue of ‘growing too fast’. Starting with a bang may mean that your business may quickly become too big for you to manage without further investment and significant resources. This can be problematic if your VC investor, contrary to the micro-managing kind described above, is more “hands off” in their approach and does not provide you with the guidance, connections and support that you need.
Things to consider
The choice about whether to seek VC will be one that is unique to your business and to you.
Before making your decision it is important that you do your research. Be clear on what potential VC firms might expect out of your relationship, and whether they are more ‘hands on’ or ‘hands off’ in their approach. Also investigate other financing possibilities, as there may be other sources of capital that align more closely to your values and the needs of your business.
Take the time to reflect on what you want to get out of your business. Think about your business’ core goals and values, and whether you’re willing to compromise on any of them (or on any decision at all) if it means allowing the business to grow. Think about whether the additional expertise, connections and resources would outweigh losing a degree of ownership or control.
All of these factors are important and none of them will be decisive by themselves. If you think that VC might be the best option for your start-up ensure that you consult professional advisors to help you understand what it will mean for you and your business.
If you are considering pursuing VC funding or want to understand how it might affect your start-up, please feel free to get in touch with our Business team.
Written by Shaneel Parikh with the assistance of Bryce Robinson.