Does your startup really need venture capitalists?

Does your startup really need venture capitalists?

Akinpelu Babatola
Guest Writer

Launching a startup is no easy feat. You will need not just a feasible idea but a whole lot of money too. Usually, most small scale startups are funded from the personal pockets of the owner(s). In order situations, they tend to source money from others.

One of such sources is venture capital.  

A startup can quickly raise most of its necessary funds and start operations pretty quickly by choosing this option. But the question remains, is it really worth it?

To answer that, we must go about learning what venture capital is, and the pros and cons of venture capital.

Let’s begin

What is venture capital?

Simply put, venture capital is funds provided by an investor in exchange for equity shares in your company. Investors are usually classified as venture capital funds or angel investors.

Venture capital funds are known for investing in several companies; usually referred to as a portfolio. While not all of these investments earn returns, most do and end up paying back their investments.

Angel investors, on the other hand, are individuals with funds to spare for investments. Typically, they choose one company or industry that they are familiar with to invest in.

Regardless of which type of investor you find, they have specific characteristics in common. Some of which are,

  • They usually vet your startup or business before investing in it
  • They are willing to be patient and earn their returns over a long period.
  • They exchange their funds as investments to have a say in how your startup operates.

The Pros and Cons

The Pros:

  • It is a source of funds: Venture capitalists usually provide all the necessary funds you need to get your startup up and running. If you are also trying to grow your business beyond what it currently is, consider finding such an investor.
  • It is a source of necessary resources: Venture capitalists are not just sources of funds. They are also willing to shoulder the burden of providing some resources and connections that you might need. This eliminates the need to start from point zero in any market.

The Cons

  • Your goals might differ: the main point of any investment is to earn returns on it. While venture capitalists may be patient to play the long game, they also want to earn profits. This may lead to them selling their stocks or exiting the company at a later point if your goals start to differ.
  • You lose your independence: Once you bring a venture capitalist on board, they end up having a say in how you operate. You have to run your decisions by them, and depending on how much stock you gave away in exchange for funds, you may end up having to do things their own way.  

Before bringing on a venture capitalist, you should weigh the projected benefits against the potential demerits. If you are unsure, then it’s best to turn to other sources for your required funds. If you can handle having them on board, then, by all means, go for it.

References

https://www.investopedia.com/articles/personal-finance/102815/does-your-startup-need-venture-capital-money.asp#:~:text=If%20you%20are%20an%20entrepreneur,you%20build%20up%20your%20business.

https://thenextweb.com/growth-quarters/2020/02/14/what-is-venture-capital-why-does-it-matter-for-startups/

https://hbr.org/1998/11/how-venture-capital-works

https://www.entrepreneur.com/article/353526

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