The Pros and Cons of Venture Funding
An instant infusion of cash is an enticing business proposition, but is accepting money from outsiders in your best interest? Consider the following pros and cons before seeking venture funding or angel investments:
Pro: The money is yours to keep. VC and angel investors are gambling on your business. If it succeeds, they win big; if it fails, they eat their losses. Unlike with a bank loan, you have no obligation to repay VC funds. If you go under, you won’t have investor debt hanging over your head.
Con: Your investors own a stake in your company. Even though you don’t need to repay VC funds, the money comes with strings attached. Investors give you money in exchange for an equity share in your company. This dilutes the number of shares you hold and can offer future shareholders. Depending on the amount of shares granted, you may be giving investors the right to make controlling decisions about your company.
Pro: Venture capital can help your company grow quickly. Without VC funds, you may have to wait for a steady revenue stream before you hire additional staff or purchase expensive equipment or technology. With an extra $500,000 or $1 million, you’ll be able to take your company to the next level immediately.
Con: Your company may not be ready to grow. If you accept outside funding before you figure out how to make your business profitable on its own, you could end up spending money on hires and expenses that won’t help your company in the long run. Scaling too early and investing too heavily in resources is the primary reason that startups fail.
Pro: VCs can connect you to other business leaders who can help you. Venture capitalists are successful entrepreneurs in their own rights, and they tend to have contacts that other businesspeople would kill for. VC investors have a stake in your success, so it’s in their interest to help you network with anyone who might be able to help your business become more profitable.
Con: Raising funds is an arduous process. Company founders often spend a considerable amount of time perfecting their pitch, shopping it around, and dealing with multiple follow-up meetings. To see whether you have the stomach for fundraising, read SEOmoz CEO Rand Fishkin’s tale about his failed attempt to secure venture funding for the already-profitable company.
Kathryn Hawkins is a business writer for Intuit and is passionate about solving small business problems.