All businesses need capital to start and sustain their normal operations. Granted, some businesses need more capital than others. The fact is, however, that capital is prerequisite for running a successful business. So, how does venture capital work into the equation?
There are several ways to acquire capital for a business, one of which is through a venture capital firm. While most people have at least heard of “venture capital,” many are unfamiliar with this type of funding and how it works.
How Does Venture Capital Work?
In the most basic sense, there are companies known as “venture capital firms” that invest in companies in exchange for partial ownership. A venture capital firm, for instance, may buy 10% stake in a business for X amount of dollars. The business benefits from the new, easily accessible funding, while the venture capital firm benefits from having ownership in the business. It’s a win-win scenario for both parties.
Because they have ownership in the business, venture capital firms may also serve on the board of directors while assisting the business in their decision-making processes.
Benefits of Venture Capital
Arguably, the most notable benefit of obtaining venture capital is the simple fact that it doesn’t require any proven income. Even if your business is still in its early stages, you could still obtain venture capital by pitching your idea to the right firm. If the firm believes your idea is profitable, it may invest in your business.
Disadvantages of Venture Capital
There are also disadvantages associate with venture capital, such as the forfeiture of partial ownership of your business. Entrepreneurs are not only financially invested in their business; they are also emotionally invested in it. As such, many are unwilling to sell ownership for capital.
Secondly, venture capital firms will scrutinize a business to determine whether or not it’s worth investing. After all, these firms are essentially handing over Big Bucks to small businesses with little-to-no track record. As such, they want to ensure their investment will reap a positive return, so they look at everything from the business’s structure and market size to objective and proposed goals.
Venture capital is just one of the many different ways to obtain funding for a business. It’s unique in the sense that partial ownership (equity) is traded in exchange for the funding.