“One of the fun things about venture capital is you are constantly learning new ideas and strategies from one business and then applying them to others.” (Joe Lonsdale, technology entrepreneur and investor)
At its simplest, the term Venture Capital (VC) simply refers to capital that’s invested in any business or project where there’s an element of risk. Typically, this refers to innovative new companies, but it can also refer to money invested in everything from opening a new branch, to updating your factory or building a new wing on your restaurant. Every deal you see on Dragons Den is a venture capital deal.
It’s true that venture capitalists tend to invest in companies that look likely to disrupt big markets, and those with patentable ideas or innovative services. But VC funding is an option for all businesses. It’s usually offered in exchange for a minority stake in your business.
If you’re considering VC for your business, you need to understand the pros and cons.
Advantages of VC
- Show me the money
Venture capitalists can provide the funding necessary to either build your start-up from scratch or to expand your existing business. The cash can come in a single lumpsum payment or through additional funding rounds as needed.
- Learning curve
Because they’ve often had experience working with similar companies, venture capitalists can offer strategic and operational guidance to help your business thrive.
- It’s all about who you know
Most venture capitalists bring a valuable network of contacts. They can often assist with hiring key personnel, accessing international markets, connecting with strategic partners, and co-investing with other firms when you need more funding.
Disadvantages of VC
- It’s a control thing
When you take money from a venture capitalist, you gain a new business partner, and you lose a portion of your ownership and control. Depending on the deal, this could mean you’re now working with someone whose methods are different to yours and who may want to take the company in a different direction.
- Pressure to sell
Venture capitalists usually earn their money when a company “exits”, either through a sale, or an Initial Public Offerings (IPO). It goes without saying that they can often have different goals and ideals to you, the business owner – especially if you want to own and run your own business indefinitely.
- Grow – or else
Venture capitalists may come with stringent requirements on growth: how fast they expect it to happen, and which targets they need to hit by certain dates. Depending on your contract, you may find the funding you expected is not released when the goals are missed.
VC has some large positives and can be a massive help to both new and existing business. However, it does also come with some large concessions.
If you are considering VC in your business, speak with us. We can help you determine the best way to meet your needs and your business goals.
We offer a wide range of specialist services, including corporate finance. Should you need our advice or assistance, contact your contact Partner at MGI Bass Gordon. Send an email to info@bassgordon.co.za or call us on 021 405 8500.
Additional reading:
What method of business financing is right for you? Find out here.
The article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.
