The Pros and Cons of VC Funding For Small Businesses

So you have an idea that you believe has the power to make a mark in the market. You begin to develop the prototype but then you realize that you need funding. Your investments may not be enough. What do you do in such a situation? As a small business owner or startup entrepreneur, an obvious choice is seeking VC funding.

Venture capital can accelerate your growth by bringing in much-needed investments. It frees up your time so that you can focus on your core competency. Almost every big successful company, whether it’s in technology, health, or finance, has benefited from VC funding. To help you understand if it is good for your small business, here is a list of pros and cons of seeking VC funding.

What is VC funding?

Venture capital companies invest in startups, small businesses, or businesses that have a high risk. These are companies that may find it difficult to receive funding from banks or through traditional financing institutions. A venture capital fund is usually backed by investment companies, individuals, and corporations. The investment they offer is referred to as private equity.

In return for their investment, VC companies seek a stake in the business. This is the reward for the risk they undertake. They get ownership of the business through stocks and seats on the board. VC firms do not focus exclusively on any one company as that would be risky for their investors. They spread their investments across several startups and businesses to reduce their exposure to any one product or category and to increase their chances of exponential success.

Pros of VC Funding

Capital investment

First, the obvious. Bootstrapping can only take you so far. With VC funding, all your financial needs are taken care of. VC funding can happen in several stages, including, the seed round. This means that you can focus on your product without having to worry about utility bills, salaries, and vendor payments.

Reduced risk

VC funding reduces the financial risk of the founders. A startup is a risky affair and pledging one’s life savings into it can be an unwise move. Reduced individual exposure will give you invaluable peace of mind, enabling you to devote your attention to the product.

Strategic guidance

This is perhaps the most overlooked aspect of VC funding. Venture capital firms are not just investors. They are also owners who are interested in your small business’s growth. They bring with them experience and expertise in grooming businesses across categories. They know how to scale a product, and manage finances better.

Networking opportunities

In the startup world, knowing the right people and companies is as important as knowing how to build a breakthrough product. Venture capitalists will have an extensive network that includes successful founders, marketers, and experienced consultants. VC funding will open doors to this high profile network that will land you opportunities to collaborate, learn, get clients, and find employees.

Better exposure

The fact that you get VC funding will put you and your business in the news. VC firms come with an established network of journalists and PR executives. That will ensure that you and your idea get the right exposure. This makes it easy to acquire clients, raise capital, and hire employees.

Access to further capital

As your small business grows, and your product begins to get traction, you may need additional funding. VC funding is a virtuous cycle that makes it easier to get further funding, either from the same firm or from another investor. This also signals to the industry that your business is on the right track

Cons of VC Funding

Reduced equity

As an entrepreneur, you have put your heart and soul into your small business. With VC funding, you are giving away precious ownership. Now there are more decision-makers with equity. As you give away further equity, you will become a minority owner in the company you started.

Exceptionally difficult

For all the news stories about VC funding, getting it is an arduous task. Venture capital firms are flooded with funding requests and it is challenging to be noticed and get funded. This can also force the founders to waste precious time that they should be focusing on developing their product.

Unrealistic expectations

VC firms expect their funded companies to stick to the plan and scale rapidly. As all small businesses know, sticking to the plan can be challenging given the changing nature of product development and the difficulty of client or customer acquisition

Added complexity

When a small business gets VC funding, the reporting structure, board constitution, and product timelines are subject to change. More often, managing a small business gets complicated.

While VC funding can help scale a small business and bring in expertise, founders should weigh all their options before seeking venture capital. They should approach VC firms only if there is a genuine need for funding, and receive only what they require.