So Many Entrepreneurs Seek Venture Capital, But Is it Really Worth it?
Finding the funds required to start a new business is one of the most challenging parts of actually starting one. Let’s face it, unless you are an entrepreneur with a string of already successful businesses under your belt or your business has been around for more than three years, you are going to find it hard to get financing through a traditional bank. This reality leaves many new entrepreneurs looking for alternative sources of funding, and for many, venture capital is one of the most common avenues pursued.
But, for a new business, venture capital may still not be the solution. There are a number of reasons why this funding resource may not be the best choice for a start-up business. Here, we discuss three of the most important reasons why first-time entrepreneurs should think twice about venture capital.
The Cost of Venture Capital Funding Is High
Working with a venture capital firm is an incredibly expensive endeavor that not many newer small businesses can afford. In some cases, the cost of capital from a venture capital firm can exceed 25%, making the funds more akin to high cost debt rather than business equity. In order for the business to comfortably afford the cost while still turning a profit, it will need to grow at a rate of 50% to 60% a year.
Entrepreneurs and Venture Capitalists Don’t Traditionally Get Along
When you start your own business, you have a vision and a goal in mind. You have put a lot of time and energy into creating your business and you have a roadmap that will help you get it to where you want it to be. When you take on a venture capitalist as a partner, you suddenly lose all of the control you once had over your business. Now, any decisions you make have to be approved by your partners. The venture capitalist will most likely attend your board meetings and want to have weekly phone calls with you. Many entrepreneurs don’t think about this when signing their VC agreements and when it becomes a reality, it can lead to a host of problems down the road.
New Businesses Are Rarely Approved for VC Funding
One of the most common reasons why new business owners should think twice about working with a venture capitalist is that in most cases, this is a road that won’t provide the results the entrepreneur is looking for. Simply put, if your business is new and unproven, then venture capitalists will most likely not want to risk the investment for all of the same reasons that banks refuse funding for new businesses. In 2012, fewer than 300 new businesses successfully obtained funding through venture capital. Compared with more than 500,000 business established, the funding rate is incredibly small with this platform. For the majority of small-business owners, their time and effort can be put to better use elsewhere.