There are various methods of startup funding but the one that is considered the most powerful and therefore the most sought-after, is Venture Capital Financing. Venture capital is the money invested by a professional investor, typically a venture capital firm, in supporting those businesses which have a high market potential but are unfortunately not bankable as they involve huge risk. Banks or other financial institutions usually do not prefer to invest in the seed stage startups and that’s where the entrepreneurs turn towards the venture capitalists.
The venture capitalists or the venture capital firms pool money from wealthy people looking to make more money. These firms then invest the money in potential business ideas or at various stages of a business. They are usually the most sought after as they are willing to take risks, but wait…that doesn’t make venture capital financing suitable for all. There are various factors that determine whether an entrepreneur is suitable for this type of startup funding method or not.
The first requirement is a unique business idea without which no venture capitalist will bother to look at the entrepreneur. A unique business idea means the product/service on offer is unique and is the only solution to a long-prevailing issue. In other words, it is a product or service which the customers are madly looking for. If there’s no uniqueness, the business is not suitable for venture capital financing. Now, this is something that investors will ultimately decide whether they like the idea or not but there is something else that only the entrepreneur will have to think about.
It is his ownership in the business. If he plans to raise venture capital, he will have to remember that this might require him to share his ownership in the business with the investor (venture capitalists) which is usually around 25 to 50 percent. Not all entrepreneurs are willing to share this asset, so in that case, venture capital is not the right option for them.
However, there are also entrepreneurs who are willing to share a part of their equity with the venture capitalists as these investors offer a lot more than just the capital. Venture capitalists are highly knowledgeable people with an extensive knowledge of the industry they are dealing with. They are masters of finance and have the ability to guide the entrepreneurs with whom they are associated with.
The guidance and sharing of knowledge by the investors immensely help the small businesses and enable them to earn huge profits in comparatively lesser time. So, it all depends upon the entrepreneur whether or not he wants to share his ownership in exchange of such mentorship. The venture capitalists have a strong network. They know influential people in the industry and once they invest in a company, the business benefits a lot from such contacts.
The venture capitalists are usually very choosy. Out of 100 businesses they meet, they might select only one or two and rest of the businesses keep struggling for their luck. This clearly indicates how minutely the entrepreneurs have to think before launching a campaign for venture capital. Without proper planning and preparation, it might just be a wastage of valuable time and energy.
The expenditure associated with venture capital is also very high which often makes it unaffordable for many business owners. No doubt, there are many advantages associated with venture capital financing, it is still essential for every entrepreneur to judge the suitability of the method so as to ensure that he is putting his time, energy and money at the right place.
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