Are you in the fundraising process and wondering what are the pros and cons of venture capital? Can there really be any downsides of raising large amounts of venture capital?
Landing big-name VCs and their tens of millions of dollars in funding for your startup is the holy grail for many entrepreneurs. There are clearly significant advantages of going this route. Yet, for every pro, there can be a con. What’s important is knowing what they are, and balancing that in your business.
Should you bootstrap? Self-fund? Stick with angel investors and friends and family? Or is VC money for you? Let’s find out…
The Pros Of Accepting Venture Capital Money
1. The Ability To Go Fast
One of the best benefits and reasons to go after venture capital is the ability to go fast. Timing is incredibly important as a startup.
If you are on the crest of the wave you need to make the most of it. Go too slow and there will be plenty of other better-funded giants trying to steal the space you created or soak up the market with similar technology and their position.
If speed is important, and it usually is, then raising VC money can be for you.
2. Buy Up The Market
When wondering about the pros and cons of venture capital one of the great tools that have enabled recent startups to get so big, so fast.
It’s even enabled them to go beyond disrupting markets to force new regulations and ways of doing things. Just look at Uber and Airbnb.
Having the capital means you can go broad and tackle multiple markets faster than the competition. It also means that at least temporarily you can afford to undercut everyone else with a loss leader. Just make sure you have a plan for closing this gap. One that doesn’t mean turning off all of the customers you’ve gained.
At this stage in your business, you may also buy up and acquire the competition and perhaps include that in your roadmap or business plan. Assimilate their talent and infrastructure and eliminate competitors. Build an even larger company by consolidating.
3. You Don’t Have To Die Right Before You Make It
The greatest risk of startup failure is normally right when things are really taking off. Your best month in orders can also be the most deadly in surviving financially. You have to have the capital to fill orders and provide an excellent user experience while waiting to get paid.
Having substantial capital in your accounts can ensure you can cover these gaps comfortably and enjoy your success.
4. Attract & Hire A Great Team
Always remember as part of the pros and cons of venture capital that winning in business is all about your team. The company with the best team wins. This can be a challenge for lean startups. You can have a hard time selling experienced startup talent to come work with you. You can struggle to make payroll.
In contrast, VC funded startups give the best talent the confidence that they can come on board and do their best work. You’ll be around long enough to complete the mission, and they can count on getting paid for their work.
5. Gaining Elite Backers & Shareholders
When you give equity to investors they automatically become invested in your success. They had to love you and your business idea to invest in the first place. Now their fortunes are tied to yours. They’ll be brand ambassadors, key connections, and influencers who help you succeed.
If you want a wealthy all-star team working to make your startup be a big hit every day, raise money from VCs.
Remember that storytelling plays a key role in fundraising. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE
The Cons Of Raising Venture Capital Money
Keep in mind when thinking about the pros and cons of venture capital that fundraising is incredibly mind and time-consuming. 50% of your time or more can get caught up in fundraising efforts.
From gathering data and designing pitch decks to flying to meetings, and fielding due diligence, you may have very little energy and time left to actually work on the business itself.
The percentage of your time and brain spent on this may decrease after several fundraising rounds, but it will never go away. Once you start raising you never stop.
You will always be needing to learn new things just for this part of your venture. Check out this fundraising training for what you need to know to raise successfully.
2. You’re Committing To An Exit
Many entrepreneurs don’t ever plan on selling their businesses when they start. Most think it is still too early to sell when they start fielding inbound M&A offers.
However, when you take VC money, you are committing to an exit. You are committing to either sell your company or go public. Be very aware of this.
3. Losing Control
When you exchange equity ownership for money, you are changing the DNA of your company. This might not sound like a big deal yet.
However, it means you are fundamentally shifting the company to a different mission. The problem you are solving has now changed.
It’s not what’s best for customers. It’s what’s best for the shareholders. That means an exit. One that will give them a big payout. Their timeline for achieving that can be much different from yours.
4. Attracting The Wrong People
When you are raising and securing venture capital you can also attract the wrong people around your business. Just like when you win the lottery or become famous and all of those mystery relatives come crawling out of every crack.
When you raise big money some people will want to piggyback on that as investors. Others will want to work for you. Or they’ll want to become advisors for a slice of equity.
Make sure these people are really aligned with where you want to go, or they can really derail you.
5. A Much Smaller Piece Of A Big Pie
Venture capital can set your startup on the trajectory to being worth billions of dollars. That’s a fantastic achievement. Just remember you are now only going to own a very small slice of that.
If everything goes south on you, you could still walk away with nothing in an exit. Even if your company is valued at $100M or $1B dollars.