What Exactly Is A Venture Capital Firm And When Do I Need One?
Venture capital firms are firms that provide financial capital to early stage start up companies with seemingly high potential. The venture capital fund actually earns their money by investing in companies and taking equity. If you are a budding start up company, it is very likely that you have considered going to a venture capital firm in order to raise funding. However, there are things that you should consider before you do this. It is important to be able to differentiate whether or not it is going to be beneficial for your business to do so.
What To Consider Before Looking To Venture Capital:
1. A Lot Of Companies Fail.
The actual venture capital process is an extremely complicated one and every single company that is invested in is thoughtfully and thoroughly researched and vetted. That being said, just because you do pass the process and receive funding does not mean that you are going to be successful or that your idea is enough. The statistics are simply not in your favor. A typical venture capital company is going to look to hit on around 40-50% investments. This should not discourage you when you are trying to receive funding or looking for capital, it simply means that you need to really focus and keep your expectations in line with reality. Otherwise, you may end up another statistic. If a venture capitalist invests in your company, it does not guarantee success. However, it does mean that you are going to have someone in your corner that you can really count on to motivate you and to push you towards success as they have a financial incentive to do so. Once you actually have a venture capitalist in your corner, you are going to want to ensure that both of you are in sync with one another.
2. Time frame.
Are you willing to work in a time frame? A majority of venture capital funds are actually structured as a 10 year commitment. This means that the venture capitalists are essentially going to be ten year investors in your business. However, that does not necessarily mean that your company wouldn’t return the investment sooner. It simply means that you are likely going to have them investing into you for a ten year period.
3. Don’t Take Too Much.
If you are planning on taking on venture capital, you are going to want to be sure that you are only taking on what you need. A lot of entrepreneurs wrongfully assume that the more money they have, the better the chances they have of success. This leads a lot of entrepreneurs to focus more on raising money than actually building a business. A majority of them also begin asking for way too much money and end up failing their fundraising attempt because of this. It is critical to not ask for too much funding and it is also important to really focus on the business, product, and/or service rather than the actual funding. If you need venture capital in order to create a viable product and/or service, then you should go for it. However, if you can get by with working cash flow without funding, you might want to try to do it. Raising too much capital is typically the greatest sin that is likely to be committed by an entrepreneur because they end up easing up on the gas pedal so to speak. by having a lot of money and cushion in the bank, you are not going to be pressed as hard as you were in the beginning stages of building your business which can lead to inefficiencies and inconsistencies. The goal is to get enough funding and working capital in order to be able to sufficiently sustain your operations for around 18 months. Once you do this, you will want to add around 25% on top of that number for even more flexibility and try to raise this amount of money in your investment rounds.
As you can see, it is not always black and white when it comes to whether or not you should try to raise venture capital. The bottom line is, if you need it, you should go for it. However, if you have enough funding to fund your operations yourself among your partners, it might be better to do without it.
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