How to start a startup with venture capital funding? Sometimes a fresh supply of cash is just what the entrepreneur needs to get a business on the path to financial success. When a entrepreneur gets investors or firms to make an initial investment in the new startup project, the company receives a chance to grow and capture a larger share of the market.
Before choosing different kinds of investors, get the facts about venture capital (VC). For instance, there are pros and cons to ponder before accepting the terms of an investor or VC firm’s offer of cash:
How it Works for Startup Entrepreneurs
The ability to attract investors will be an important test of the entrepreneur’s business skills. Fortunately, if you have not been able to attract angel investors or venture capitalists to pump money into your company, there is hope. You can receive assistance from a business mentor or hire the services of a business consultant.
Types of Venture Capital for Startups
Consider potential investors in your business from the perspective of your company’s age. If your small business is a startup, you probably want to attract angel investors. You may find angels who will assume a great risk by investing smaller sums because they believe your business idea has great potential. Angels count on getting their money back at some point after you open for business, usually regular payments once your business begins to generate more revenues than expenses.
Venture capitalists will make larger investments than angels, such as millions of dollars. They will want to invest in a proven business concept and therefore will seek established companies. A VC firm will seek influence such as by joining a company’s board of directors and providing direct operational oversight. If a VC is investing in a small business at the startup phase, the initial investment will be smaller, and the funding will be designed to get the startup company through the first 12 to 18 months of operation until the first milestone is achieved.
It is important for VC firms to safeguard their investment by getting involved. They are anticipating returns down the road and are assuming a substantial risk in the beginning. For example, venture capitalists provide support to the business by investing in rounds of financing. When a company reaches a milestone, it will qualify for another cash injection. The next injection will not be available until the company attains the next milestone.
Who Can Apply for Venture Capital
Companies that need to finance their planned expansion can look for cash injections from VC firms. Some companies choose alternatives such as selling off assets so they have capital to expand instead of going the VC route.
A venture capital arrangement can be made under contractual terms, but there is usually a condition that allows the VC firm to request to be paid off. If this happens, a business can be forced to sell stock through an initial public offering or adopt another immediate strategy, such as selling assets, to keep the business going.
Entrepreneurs want to consider injections of capital, such as $500,000 or $1 million, when their company is well-developed. There are advantages of VC, including
- securing a larger amount of money than you could from a commercial lender or government lender,
- turning your shares into more money in a shorter time frame,
- benefiting financially from a VC firm’s experience in the form of the business advice it will provide,
- sharing some financial risk of expanding your small business, and
- getting financial assistance from different kinds of VC firms, such as those specializing in early stage (startups) businesses or late stage (fully developed) companies.
Even though a VC firm can review your business and identify a lot of value in its shares, it can be disadvantageous to accept VC funding. Some cons are
- agreeing to give up some shares to your investors,
- surrendering some managerial control to a VC firm,
- risking that a VC firm will take the company to the initial public offering (IPO) too soon,
- sharing more private information about yourself and your business record than you want, and
- sharing privileged information about your business model.
Before choosing to work with angels or equity investors, ensure that the pros outweigh the cons. You might find that external funding is the only way to grow your next startup.