Wherever a business is in its lifecycle, funding is a critical factor in driving growth and, ultimately, success. Many businesses do this through venture capital. In this article, we explore the pros and cons of venture capital, particularly in terms of seed, scaleup and series A funding and how these forms of venture capital can provide the resources and expertise to maximise the potential for success.
The Pros and Cons of Venture Capital Funding
Advantages of venture capital funding
In the earliest stage of any business venture, funding can be one of the biggest challenges. Securing a loan for an untested business idea can be very difficult. Venture capital is an alternative option for many. Once invested, the venture capitalist becomes a shareholder and has the right to receive a proportion of any profits; however, venture capital funding comes with other advantages besides access to much-needed finance.
Expertise – Depending on the source of the funding, many venture capital firms can bring expertise and experience to the table – which can be invaluable for a small business just starting out.
Validation – Furthermore, having a venture capital firm invest in your business brings with it a certain prestige. It acts as a vote of confidence that attracts other investors and partners, as well as customers. It may also help you attract top talent to the venture.
Networking opportunities – As well as expertise, venture capitalists have extensive networks of professionals and industry leaders that can lead to alliances and market opportunities that can accelerate growth.
The downsides of venture capital funding
As with any form of funding, there are downsides to consider.
Loss of equity – In return for funding, venture capitalists will receive a shareholding in the business and this may be sizable, based on the risk involved. Some business owners may be reluctant to give up a large stake of their business, or profits.
Loss of control – Not every business owner wants someone else having a say in how the business is run, but this may be the only way to secure funding.
Short term thinking – venture capital firms are typically focused on short-term gains rather than the long term. This can mean a lot of pressure on the business owner to increase profitability as quickly as possible. It can lead to risky decision-making.
Types of venture capital funding
The type of funding available will depend on what stage the business is at. The good news is that there is a lot of funding out there coming from venture capital funds, institutional investors, accelerators, angels and crowdfunds.
Seed – This is the earliest stage of venture capital funding and is often used to finance R&D and market testing the business idea. However, it may be expensive funding and can significantly dilute the founder’s ownership stake. This type of funding usually comes from incubators and accelerators.
Series A – The seed stage is usually followed by Series A funding, typically used to finance the launch of a new business and is valuable for gaining traction in the market. It’s at this stage that the business should have a plan for developing a business model that will generate long term profit. This can be tricky to secure. Fewer than 10% of seed-funded companies will go on to raise Series A funds as well.
Expansion and scaleup – As the name suggest, this is used to finance the growth of an existing business to scale operations, enhance production capacity and enter new markets. This can mean a further reduction in the ownership stake of the founders that gives control to the venture capital firm at a pivotal moment in the company’s development. To get the right funding, get the right funding round advice first.
Venture capital plays a crucial role in the lifecycle of many successful businesses. From seed stage where ideas come to life, to scaleup and expansion where growth and market dominance are pursued. However, it comes with a dilution in ownership and reduction of control, so it’s vital that businesses get the right legal advice before embarking down the venture capital funding route.
Book online for a free 15-minute introductory call to explore the legal aspect of raising funds with one of our business specialists.
