For any type of business, finding funding is hugely important. True, some businesses are more capital intensive than others, but some amount of money is a necessity for just about any business venture. However, securing financing is sometimes easier said than done.
Some new businesses sometimes have trouble securing business loans, due to their limited credit history. Others would prefer to avoid traditional means of financing.
Venture capital is a popular alternative to traditional business financing methods. But, what is venture capital funding? How does it work? And, is it right for your business?
In It to Win It
Venture capital firms are in the business of profiting from investing in promising businesses during their formative stages. Many venture capital firms specialize in investing in businesses in a specific industry, but there are plenty of venture capital firms out there, so most businesses should be able to find a source of venture capital financing.
Advantages of Venture Capital Funding
If the business succeeds, then venture capital investors stand to profit handsomely. If it fails, they lose their investment. That’s the calculated risk they take on when making an investment.
Businesses that secure financing via venture capital firms are not under any obligation to repay the funds, should the business fail. This is in contrast to a business loan, which must typically be repaid by the business owner, even if the business fails to become profitable.
Securing funding from a venture capitalist can be a great way to build a business’s network of contacts. Most venture capitalists are well-connected in the business world, and businesses that they invest in stand to reap the benefits of their extensive connections.
New businesses may also benefit from the guidance of venture capital investors, who tend to come from successful entrepreneurial backgrounds, often in the industries in which they are investing.
Businesses financed by venture capitalists stand to grow more rapidly than businesses that must wait until their revenue will support expansion. With a stockpile of extra capital on hand, businesses can afford to scale up rather quickly.
Many venture capital firms take a hands-on approach with businesses that they invest in. While it can be beneficial to have an experienced adviser to help guide the company, many business owners would rather not surrender the level of control that venture capital firms might seek.
While business owners certainly have a need to secure financing, they might also be reluctant to give up the substantial slice of the profits that venture capital firms require, in order to make investing in fledgling companies worth the risk.
For some businesses, it is more profitable to start small and let the business grow naturally, building business credit, and taking out business loans as needed.