Venture funding reached new heights in 2021. Globally, investment in startups totaled $643 billion, representing a 92% YoY growth.
For a startup seeking VC funding, it’s crucial to evaluate both short- and long-term implications of raising venture capital. Let’s take a look at the pros and cons of using venture capital to finance your growth.
Advantages of Raising VC
Getting access to Expertise and Mentorship
Probably one of the main advantages of getting support from VCs is obtaining access to the investors’ experience, network, and mentorship resources. VCs tend to invest in the industries and businesses they are familiar with and have a wide experience in the startup ecosystem. Hence, they can guide founders on a multitude of subjects: from bouncing the ideas to governing financial performance, marketing and PR, structuring and hiring the team or pivoting the business. Some funds provide their portfolio startups with perks like free access to business growth tools or top-class mentorship. Finally, working with VCs provides a startup with access to a network of potential partners, clients and other investors.
Sharing the Risks
Getting venture funding means the founders share their risks with the investors. Even more importantly, having experienced partners who are directly interested in the success of the business means getting help with avoiding common founders’ mistakes. Startups funded by VCs can count on them to help make a decision in a complex situation or mitigate market risks.
Building a Foundation for Growth
Most VC-backed startups tend to raise follow-up investment rounds as they grow. Having a respected and well-recognized investor backing your startup paves the way to the future rounds, acting as a seal of approval for other VCs.
Disadvantages of Venture Investment
Diluting Ownership and Control
Raising venture capital means diluting the startup’s equity to issue shares to the new investors. Same goes for the follow-up rounds: founders gradually lose the share of equity in the company they build. VCs also get a say in the way the company should be run, getting some control. In some cases, the founders are forced to quit or step down from the senior leadership positions, or to enter an M&A deal if VCs see it as a good move to protect their investment. Hence, startup founders should be careful with giving away too much decision-making power by raising only the amount that’s necessary.
Significant Efforts Required for Due Diligence and Investor Relations
VCs are likely to scrutinize startups, especially the early-stage ones, to predict potential risks and returns. Hence, startup founders are expected to spend a lot of time to deliver detailed answers and explanations during the investment due diligence and later stages.
Venture investment is relying on high return, but is always associated with high risk. For that reason, VCs take their time to make an investment decision, which often puts off the founders needing the growth resources as soon as possible. Unfortunately, startups, especially the early-stage ones, often do not have a leverage to speed up the process and have to rely on bootstrapping, revenue or previous funding until the decision is made.
Investors Favouring Certain Industries
Finally, some startups have simply more chances to get funding than others, depending on what’s hot on the market. For example, businesses working in fintech, healthtech or e-commerce had more chances of getting funded in the past two years due to the challenges of COVID-19 pandemic. While startups working on solutions which are not trending right now might find themselves in a more difficult position when trying to get attention from VCs.
To wrap up, venture capital is great, but not the only one source of funding for the business. Such alternatives as accelerators, government-backed grants, small business loans, corporate investment or even an M&A might be a good alternative for startups depending on their growth stage and current state of business. When making a decision to raise venture funding, it’s important to pick the right partner and discuss all terms and conditions upfront.