Venture Capital – Advantages and Disadvantages

Introduction

The sharp increase in entrepreneurship over the course of time has facilitated a number of changes within the realm of the business world that have surfaced as a result. Venture Capital is one such change in the business dynamic that has appeared to be an interesting approach towards entrepreneurial financing.

Venture capital can simply be defined as a method using which investors invest finance into businesses, in order to help them grow and prosper. These businesses are usually businesses that are risky investments but have high growth potentials.

The goal of the venture capitalist in this regard is, therefore, to ensure higher returns and exponentially multiplied payouts once the startup gets acquired, or there is an IPO for the company.

Venture Capital Firms are mostly run by a number of partners, who have managed to pool in a considerable source of finance, based on which the group can invest on behalf of these companies. They are mostly large state institutions and use venture capital services in order to help venture capitalists (the partners) generate large sums of money.

Advantages of Venture Capital

There are a number of advantages that occur as a result of investment raised and maintained by venture capitalists.

Growth Opportunities

Firstly, it can be seen that it provides an opportunity for growth for the company. This is the amount that can be utilized by the company in order to finance their operations so that they can ease into the market, and create a footing for themselves.

Venture Capital Experience

Venture Capital Firms, as mentioned earlier, is established by high net worth individuals who have had the experience, and entrepreneurial success, of some kind.

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This experience can help companies to benefit since their advice can potentially help them grow and expand into different areas of interest that are likely to add considerable value to the company.

Connections and Networking

The contacts and information that is pooled in by Venture Capitals help young businesses establish their connections in the business world and ensure that they are able to create a proper marketing funnel using these contacts and networks of these people.

Controlled Liability

In the case of venture capital, entrepreneurs don’t always have the pressure of having to repay the amount that is invested by the venture capitalist.

In the worst-case scenario where the company is unable to render the desired advantages, the liability is quite controlled and limited. Entrepreneurs do not have to be liable to repay the amount invested by the Venture Capitalists.

Disadvantages of Venture Capital

Despite the fact that Venture Capitalists provide excellent opportunities for growth for the company, there are some downsides that must be taken into account in order to get a clear picture regarding the viability of the venture capitalists. These disadvantages are given below:

Dilution of Ownership and Control

The greatest disadvantage of Venture Capitalists is the fact that it requires a trade-off. In exchange for the amount that is being invested by the Venture Capitalists, the entrepreneur is supposed to let go of a certain percentage of the company. This results in ownership dilution, which is unavoidable.

Unprecedented Redemption

Given the fact that venture capitalists invest in the company for capital gains, it can be seen that they might redeem their investment in a quicker short frame, even when it is not feasible or favorable for the business. This is a risk, which might adversely impact the financial position of the company.

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Operational Difficulties

Given the high stakes at the place, it can be seen that there are a couple of processes that need to be completed in order to get a venture capitalist on board.

This might include the tedious process of valuation, and ensuring that companies are able to value their business in an accurate manner. Undervaluation might result in a detrimental impact on the business.

Higher Payouts

Venture Capitalists may also demand for higher payouts, because of which the company might face an excessive pressure. It might also come with strings attached, which might not exactly be in line with the vision of the founder of the company.

Conclusion

Therefore, it can be seen that investments from Venture Capitalists come with its fair share of issues. However, it is imperative that the advantages of venture capitalists clearly exceed the downsides, because of the overall potential it provides to entrepreneurs for growth.

For entrepreneurs, it can be getting a renowned venture capitalist onboard acts as a process of validating the overall idea. Therefore, it exponentially adds to the value of the company, because it adds to the credibility of the business.

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