In many ways, the dilemma of deciding whether to take venture capital money from an interested VC firm can be filed under “Good Problems to Have.” The majority of startups never get to this point, either failing outright, or, even if they are profitable, they simply never build the type of company profile that fills VC investors’ imaginations with visions of high returns. But for those businesses that, through a mix of hard work, innovation, and luck, have reached the point of attracting the attention of VC firms, the decision of whether to take their money is still a hugely important one, and one that comes with high risks and high rewards. Below, I’ll cover a few of the primary pros and cons of taking venture capital investment that you’ll want to have in mind as you work through this stage of your company’s life growth.
The Pros of Taking Venture Capital Money
1.You’ll Receive a Major Infusion of Capital
This is the obvious (but not the only) benefit to bringing in VC money, and, many times, the only aspect startup founders focus on. Clearly, more money – especially at the levels that VC firms are able to provide – gives startups the ability to simply continue to exist while paying salaries, vendors, bills, and creditors. At the same time, more money means a startup can bring in new talent, continue to develop products and services, and enter into new markets without being constantly worried about putting out financial fires that might previously have tipped them into insolvency.
2. Your VC Partners Will Be Motivated to Introduce You to New Markets and Investors
Beyond just the initial money that your VC partners will provide, more financing/investing opportunities will manifest as a result of your connection with your new partners. They will literally be invested in your success, as their fortunes are now tied up with yours and you are essentially “on the same team,” and they will be motivated to use their connections and leverage to get your company into new markets and potentially in front of other investors. Even without this direct influence, other investors and influencers will see that you are connected in a very tangible way with VC partners and may be inspired to get in on the action as well.
3.You Will Receive “Free” Advice and Direction from New VC Partners
Related to the previous point, your new VC partners will be motivated to provide you with all of the “free” business advice and direction to you and your partners as possible to help steer you and your company into profitability and success. Naturally, not all of this advice and direction will be in 100% accord with your vision for the business (see “You Will Now Have Someone to Answer To” below), but many VC investors have been around the block or time or two with respect to making businesses work, so be sure to take as much as you can from their presence.
The Cons of Taking Venture Capital Money
The entire company vision may have been your “baby” for years, but when you bring in VC investors, you will own only a part of that baby going forward. The amount of dilution will of course depend on the terms of the deal you negotiate with your investors, but always remember that your VC investors, no matter how much they love your ideas, got into this business to make a lot of money, and that is what they are expecting to take from your business. Your portion of the company’s profits may go way down, and your ability to guide the direction of the company through shareholder voting will go down as well.
2.You Will Now Have Someone to Answer To
Bringing in outside VC investors can cause major changes in the way your business is run, as, in many ways, it will no longer be “your business.” This shift in power structure can affect all aspects of business, from the way your products are developed and marketed to who you can and can’t hire or what the future and direction of the company culture and ethos might be.
3. Pressure to Exit
Speaking of the future, your VC partners may love your company and the future profits it might bring, but they may not love the idea of seeing you in your (ahem, “their”) company’s future. Many VC firms have the overarching goal of either selling the company in an M&A deal or taking the company public in an IPO. In either case, your future with the company is uncertain, and, frankly, you may not even last that long if they have other short-term goals in mind for the business.
It’s Your Choice, But Choose Wisely
As you can see from the above, the decision to accept VC money may be the single greatest choice you can make for the long-term success of your company, but it may well be the last decision you ever get to unilaterally make on behalf of your company.
© 2016 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.