There are more startups than ever before post-pandemic. As the e-commerce industry continues to boom and work from home remains a trend amongst the corporate sector, more entrepreneurs are using their funds to create new digital startups in a number of niches. However, from staffing to manufacturing, starting a business does not come without its costs.
This is where venture capital comes into play. Defined as a type of private equity investor funding given to startups that have growth potential, VC can play a huge part in business growth success and can facilitate a number of startup-based costs.
(Image Source: CB Insights)
In fact, VC-based funding has boomed within the last decade, reaching a whopping $753B worth of investments since 2009.
Read on to find out more about the advantages and disadvantages of VC funding and some of the smartest places to invest it within the business.
What is venture capital and how do you get it?
Venture capitalists are investors, looking to invest capital into new startup-based companies in exchange for equity, otherwise known as a stake within the company.
For small businesses looking to expand, or new digitally based startups within the market, VC funding can help a business lift off of the ground and provide access to the equity market.
VC-based funds are often made up of experienced business leaders and high-stake investors who are able to not only offer capital to smaller companies but provide expertise and strategic advice for young entrepreneurs who are new to the game.
Venture capitalists are most likely to target a startup with significant growth potential, i.e., a business idea with a new angle for their niche market, or a unique product/service that is predicted to do well in today’s climate. In order to receive VC, you need to have a proven track record, and a plan for success that venture capital investors are willing to invest their time and money into.
What are startups spending their first round of VC on?
The average venture capital investment ranges between £1-2 million/$1.5-3 million and is paid over a number of years as the startup continues to expand. Within this time, venture capitalists aim to make a return on their investment as the company grows, owning both a stake and some of the control over the company’s future.
You may wonder which areas of the business’ foundations are the smartest to feed money into. From staffing to marketing spend, here are some of the most common areas that start-ups will target first as they acquire capital.
This one may seem like the obvious answer, but developing a strong workforce is vital if startups want to see success. With large amounts of VC funding to spend on both manufacturing and sales, business leaders first need to establish a team of specialists to assign to new increases in production and sale expansion both nationally and globally.
Using VC to aid staff hiring and training will develop a more productive workforce with a larger value add for the company. Utilizing the knowledge and experience of staff will result in higher levels of production, in turn, increasing profits as the business continues to grow.
Developing new products
With an average capital investment of $1.5 million, business leaders are able to put some of this money aside to collaborate with their VC funders and come up with new, unique product development ideas.
Encouraging business growth is all about creating new angles within a niche market and investor finding can facilitate that. Using VC spending to aid product development is a smart investing strategy as this could put startups ahead of their rivals thanks to a boost in both planning and manufacturing-based resources.
Prioritizing marketing efforts
Did you know that post-pandemic, 46% of business leaders are investing more capital into their market spend, in comparison to just 12% pre-COVID? As businesses continue to move online, prioritizing marketing efforts is vital if startups want to remain on top of their components.
Using VC capital funding, smart marketers can invest more money into ad campaigns, social media content and SEO-based efforts. Raising engagement and brand awareness is a great way to increase sale rates and conversions, providing startups with more profits and a foot in the door of their niche.
Are there any disadvantages to VC funding?
While VC-based funding can be a great asset for startups looking to get themselves on the market map, business leaders are often skeptical about giving away their control.
As private equity funding can often result in giving away a hefty stake of your business in return for capital, many venture capitalists will want to be involved within the business decision process and may even veto ideas if they don’t think they will earn profits.
This can pose a tough call for young entrepreneurs. While VC funding will help you contend within a competitive market, loss of control and/or ownership of the business does need to be considered before moving forward.
Originally published Jan. 21, 2022.