Over the last eight weeks, we have discussed funding sources available for a startup or existing businesses in the infancy stage. I have covered, Small Business Administration 7(a) Lending, SBA Microloans, using credit cards, non-bank lenders, and Angel investors. In my final post on funding, I would like to discuss Venture Capitalism. Investopedia defines Venture Capitalist as, “an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to additional funds.” (Investopedia.com) Venture Capitalists act similar to Angel investors, however, instead of investing personal funds they utilize a firm’s capital to make investment deals.
VC’s are all about a company’s valuation, strong management, and a keen competitive advantage. Their goal is to invest low and yield high returns with a controlling interest. As an entrepreneur, it is imperative to have an idea as to what you are willing to give up when seeking venture capital. Actually, when seeking funds from any investor. I would not be uncompromising, but I would advise an entrepreneur to consider if a VC deal would be a good fit.
In the book Entrepreneurial Finance – Finance and Business Strategies for the Serious Entrepreneur, Rogers and Makonnen quoted a VC saying, “I’m going to pay you as little as possible for a much of your company as I can get.” Entrepreneurs need to be cautious not to give away too much of their company for the sake of getting capital. Yes, VC’s investment needs to yield a profitable ROI especially because they are assuming so much risk. However, the entrepreneur should not “make a deal with the Devil,” to get the necessary funding.
Please note that I am not saying all VC’s are bad, but they are “in it to win,” as all investors are. Entrepreneurs just need to be aware that VC’s usually require a large stake in the company to make an investment. Between Venture Capitalist and Angels, I am in favor of Angels. What about you? Overall what investment option do you think would work best for you?
Venture Capitalist – Investopedia – Sharper Insight (N.D.). Retrieved from http://www.investopedia.com/terms/v/venturecapitalist.asp
Roger, S. & Makonnen, R. E. (2014) Entrepreneurial Finance – Third Edition: Finance and Business Strategies for the Serious Entrepreneur [Kindle Edition]. McGraw-Hill Education & Amazon Digital Services LLC