Start-ups can be defined as companies or businesses that focus on one single product or service with the hopes of introducing it to the market. A start-up can be individually owned, or two or more investors can be its founder.
The greatest challenge that most start-up businesses face is finding investors willing to sponsor the product or service by investing money into the business. Although we have various funding sources such as Angels, Angel groups, and Syndicates, we will focus on Venture Capitals in this article.
What is Venture Capital?
In venture funding, the investors offer financial, and business skills support to entrepreneurial talent to obtain long-term capital gains through market opportunities exploitation.
With the adverse effects that start-up businesses have suffered during the Covid-19 pandemic, there are great expectations in the middle east, especially the UAE, with an expected $60m venture capital fund set to be invested in 120 early-stages as a technical boost to start-ups post-Covid-19 pandemic.
With such great news in the offing, it is beneficial for start-ups to have a clear understanding of what venture capital is all about, with its pros and cons.
Advantages of VCs
Valuable Guidance, Expertise, and Consultation
As noted in the definition of venture capital, a young start-up company benefits from financial assistance and business skills support. This valuable business expertise can help the start-up develop good business decision-making, proper human resource management, and financial management. Like in any other business, the business decisions taken and applied will either make or break the business.
Opportunity for Company’s Expansion
When start-ups borrow from banks, they are asked to provide collateral, and the money borrowed must be paid back with lots of interest. As a result, expanding the company under such circumstances can prove challenging to achieve.
However, venture funding allows start-ups to grow and expand. With venture funding, start-ups do not need to worry about collateral or loan repayment, as investors take the risk upon themselves in putting their trust in the start-up’s long-term potential success.
Disadvantages of VCs
Joint Control and Ownership
If your start-up company is seeking funds from venture capitalists, it is good to keep in mind that the investors will want to be part of the business’s management for the vast capital provided. This is the only way they can safeguard the money that they invest in your company.
As such, the owner of the company doesn’t enjoy total control over his company. Management and ownership are co-joined between the owner and the investors. Major decisions will require the consent of the investors. This arrangement can work well as long as different opinions don’t rise between the VC and the start-up founder. Otherwise, things can get ugly.
High ROI Required
Before settling for VCs, it is essential to estimate your start-up company’s amount of time to generate a specific investment return. This is because some VCs demand high returns on investment over three to five years of investment.
To avoid stress and conflict with your investors, if your start-up company cannot generate such an amount in ROI, it would be advisable to look for other alternatives as VCs may not be your best choice.
VCs, give you the financial and business support needed to grow and expand your company long-term. If your start-up company is in a position to generate the required ROI, and if you are not majorly concerned about dilution of ownership and management of the company, go right on and get funds from VCs.