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Advantages and Disadvantages of Venture Capital

Venture Capital Funding

When a startup or new business has a great idea but is struggling to obtain financing through traditional sources such as a bank, venture capital (VC) funding is a solid alternative. Venture capital investors are typically more willing to provide funding to startups and other small business operations when they see potential in their ideas. This gives entrepreneurs and startup founders the ability to realize their business dreams.

There are both advantages and disadvantages for a business or startup when seeking VC funding for their business. It is important for startups, entrepreneurs and small businesses owners to understand these in order to be sure that venture capital funding is the right decision for them. Many startups find it advantageous to work with an attorney specializing in venture capital for guidance navigating these arrangements.

Advantages of Venture Capital

As mentioned previously, one of the biggest advantages of venture capital funding is its availability to startups and entrepreneurs who otherwise would not be able to get funding through traditional means such as a bank. In many cases, this can be the difference between a business getting up off the ground or just remaining a good idea. Venture capitalists are willing to take much larger risks than a bank, as long as there is a possibility for a big reward.

In addition to this, venture capitalists often have many years of experience working with startups, and have a unique perspective that can offer valuable insight into situations that may concern or baffle a startup founder or entrepreneur. As part of the VC funding process, venture capitalists normally have a direct say in the company and sit on the board, where they have the ability to offer their expertise in solving problems or addressing questions. They also usually have a larger network of knowledgeable individuals who the startup owner might not have connections with who can be of use to the business.

Disadvantages of Venture Capital

While there are a number of advantages to venture capital funding, there are several disadvantages a startup owner, founder or entrepreneur should consider when making the decision as to whether VC funding is right for them. The first of these is that they will inevitably lose a portion of their business ownership and revenue to the venture capitalist, sometimes indefinitely depending on how the contract is configured. Venture capitalists do not just give money to businesses for charity – they expect to make a considerable profit in return for taking the risk of investing in a startup. This means that the startup founder needs to be aware that by accepting VC funding they will no longer be solely in control of their company’s destiny.

Sometimes there are issues that come up when a startup has a bad VC representative on the startup’s corporate board. This can result in an overly restrictive corporate covenant that will allow investors to veto significant corporate decisions and actions. This can result in a startup’s leadership management becoming fractured and cause a number of issues that can cause serious long term repercussions such as a toxic work environment. Sometimes this is so problematic that a company will be unable to innovate, adapt to changing market conditions or continue to grow. Because of this, it is vital that a startup vet their potential venture capitalists properly to ensure that they will not be a detriment to the long term success of the company.