As a new or young company, seeking to fund your startup, it seems pretty straightforward that venture capital would be a good option.
Yet, while there are many advantages to it, we’re going to look at five disadvantages of seeking venture capital, and why it might not be right for your business.
#1: You may lose control
Before you get venture capital, you (and your partners) have total control of your startup. After you get funding, you transfer part of your control to your investors.
This means that you can no longer make all of your decisions unilaterally. You must consider the voice of your investors. And for some startups, this is a loud voice.
Imagine that you have a specific vision for your startup as well as a set of values. You want to set your company culture as well. This can be a problem if your investors have a different way of thinking.
When deciding whether to seek venture capital, research your potential investors. Talk to other startups they’ve funded and try to learn as much as you can before accepting money.
#2: You own less
By taking on venture capital, you have to dilute your equity in your company by giving your investors part of it.
In addition, you have to do this for each investor you add. This means that you lose majority ownership in your business, and this is how you lose all the decision-making power.
#3: You need a formal structure
For businesses that take on venture capital funding, they must set up a board of directors. This leads to a rigid structure within your startup as well as ongoing reporting needs.
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While this can help you scale and grow, you may find it severely limits your flexibility to run your business the way you want.
The board of directors will maintain control, and you’ll have to answer to them.
#4: You’re expected to grow rapidly
The expectations are high when you take money from a venture capitalist because their money is on the line.
They want a huge return on their investment, and they would prefer you did it quickly.
This can create a lot of pressure for startup founders.
To help you manage this and decide whether it’s an actual disadvantage, you want to know the expectations of your investors upfront. Ask this before signing any contracts.
#5: Funding can be hard to get
Another disadvantage of seeking venture capital is that it can be hard to find and eat up a lot of the startup founders’ time.
According to one source, each year, over 500,000 companies are started in the United States. Of these, venture capitalists invest in fewer than 1,000 per year.
This doesn’t look promising for most startups, and you can see how much searching you might have to do to find someone to fund your startup.
Your search can take away from your daily business duties, leaving other activities undone.
Final thoughts
Your best bet is to do your research and then take a few moments and study the advantages and disadvantages of seeking venture capital before jumping in.
Obtaining venture capital isn’t always as simple as it seems, and there are certainly strings attached.
When you allow investors to have a stake in your company, you can expect them to take part in shaping your startup and your company culture. It may not always be the way you want.
You want to understand your risks and consider your options, so you are in a better position to decide if it’s right for your startup.
If you decide it isn’t, you may find other suitable funding options as well that may not come with as many stipulations.
Want more?
Escalon can help ensure that your accounting, financial records and taxes are accurately done and that they communicate the full value of your business to potential buyers. Talk to an expert today.
Image: Josh Appel on Unsplash
