Pros and Cons of Venture Capital as a Source of Finance

Venture capital (VC) refers to an investment fund provided by investors to businesses in their early stages, where the investor gets some stake (ownership rights) in the business. Usually, an entrepreneur comes up with a promising business idea but may lack the financial resources to put their ideas into action. Venture capitalists come in to provide the required capital and management support to the new business. Like any other source of capital, venture capital has its own advantages and disadvantages.

The advantages of venture capital are:

  • Venture capitalists provide start-up businesses with valuable information, guidance, consultation and advice on various aspects of the business. This can help in improving business outcomes and decisions, including in human resources and financial management.
  • They provide additional resources and support on areas such as legal, tax, and personnel.
  • Networking and business connections – venture capitalists are resourceful networks for companies because they are often connected in the business community; so they can even be an important source of knowledge, information, technology, and connection with customers in the community.
  • Limited liability – business owners are not liable for any losses or liabilities incurred in the business; so they are not liable to refund venture capitalists if the business results are not achieved as planned.

The disadvantages of using venture capital may include:

  • Loss of control: the business owner or entrepreneur loses control of the company because venture capitalists demand rights in the company before providing the required funds.
  • Expensive: The services and processes leading up to the provision of venture capital are quite costly. Those services may include negotiations in the presence of an attorney as well as due diligence and documentations.
  • Loss of Ownership: venture capitalists may demand too much ownership during negotiations, leading to the owner’s loss of majority control. In fact, the start-up founder or founders may become minority owners with less than 50% of ownership.

Finance managers ask the following questions before making the decision to acquire finance through venture capital:

  • Are you open to more active input from a venture capital firm?
  • Do you appreciate the additional expertise and resources a VC firm could provide?
  • Is loss of ownership and control an issue for you?
  • Could you gain through a VC firm’s business connections?

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