Venture capital, a kind of equity funding, is basically an investment that combines a life insurance policy and mutual fund shares. With this method, the investor is shielded by the protection of the insurance policy (collateral), and also gets the added bonus of growth potential of the mutual fund. The definition of equity funding could be the exchange of money for a share of business. This permits business owners to acquire funding without incurring any debt, but you can find potential downsides of venture capital all entrepreneurs should take note of.
Venture Capital Myths Dispelled
Many startup companies searching for funding often consider venture capital as a feasible solution-but this is often not the most effective choice. While venture capital might be viable for a few businesses, there are lots of factors to take into account ahead of deciding to use this sort of funding.
When searching for business funding, the end goal of obtaining funding is often the only factor given consideration. More importantly, business owners must recognize that the technique in which funding is obtained will have both positive and negative short-term and long-term consequences, depending on the ultimate end goals. As previously stated, venture capital is typically committed to a business in trade for shares in said company. With respect to the number of capital received, that may mean the business owner loses ultimate control on the business Scout Ventures. When the investor and business owner have misaligned goals, this might translate into huge problems. Venture capitalists invest in companies most abundant in potential to appreciate extreme growth in hopes of an eventual sale of the company. If your end goal does not include the eventual sale of one's company, or there is an opportunity that you will get a nominal return on investment for the sale of the residual shares of one's company, an alternative funding option should be considered.
Another misconception is that venture capital is somewhat an easy task to receive. It requires time to contrive an affective funding proposal and to find investors who are actually willing to read and consider your proposal. Regardless of the substantial amount of time used on the funding proposal process, the majority of businesses never actually receive venture capital, because regardless of how innovative your organization is, venture capitalists have high expectations and aim to make sure high yields on the investments-sometimes 30 percent or higher. This brings us to the high cost of venture capital. Unlike debt funding, there is no amount that must be repaid, but with a 30 percent return on investment, along side salaries and bonuses, venture capital becomes very expensive. While this money may certainly not be via your wallet, it is via somewhere-your business.