Not every company is one that can be backed by venture capital. Pursuing venture capital investment in your startup is a decision that you’ll make based on your company strategy. If your business requires lots of capital and will need to scale quickly to beat potential competitors to gain market share, then VC financing is right for you.
Below, I will run down five reasons why you should consider pursuing venture capital for your startup. But first, let’s explore the alternative options.
What are the financing options for my startup?
In looking to finance your startup, there are a number of options to consider. You can read up on them here. The most common routes include:
- Bootstrapping: Using personal funds or revenue from the business to grow slowly and sustainably
- Factoring: Selling receivables at a discounted price to get access to the cash you need to run daily operations
- Crowdfunding: Using digital platforms to share your business plan and collecting donations from the general public
- Business loans and grants: Applying to banks and small business grants to help fund early product iterations and other building blocks of the company
- Friends and family: Typically a one-time fund from your network to help you get through some one-time costs
These can all be viable options because they provide an influx of cash. However, there are some major drawbacks to these funding efforts. In the first place, they all come with more than a few strings attached.
Secondly, this assortment of financing efforts rarely produces enough capital to scale, which is exactly what most founders want with their business idea. Not to mention, they come with little to no expertise or guidance in how to scale your business.
This leads us to the other common type of funding: venture capital.
What are the benefits to venture capital funding?
The only financing option that offers a very deep well of cash that allows you to build a large business quickly, without draining cash flow, is venture capital.
Here are five benefits to getting venture capitalists on board with your startup:
- Been-there-done that: The partners in a VC firm have typically built a business or two. They’ll bring their experience to you in the form of anecdotes, processes, guidance and lessons learned.
- Sounding board: Let’s say you have some pressing issues to figure out before launching your product. A VC firm will love nothing more than giving their opinion on your current situation.
- Referrals: Most VCs will have a stable of folks that they’ve worked with in the past that they’re likely to suggest you hire. This can be a blessing if they bring the right people. It can also provide access to folks you wouldn’t otherwise be able to hire.
- Benchmarking: If you have a pre-revenue company, it can be hard to get an accurate estimate of company valuation. This is part of the reason why the investor trend is to fund late-stage companies, as startups that already have customers and report healthy revenue are less risky propositions. So do what you can without venture capital fundraising, because every little success you achieve on your own will make your profile more appealing to funders.
- The next round: When you raise venture money, the goal of raising money in this round is to get ready for the next round. While many companies dream of doing one round and becoming profitable, this rarely, if ever happens. Most times the accelerated growth leads to accelerated costs. Which leads to more financing rounds.
Rounding it up
While I am not trying to make an argument in favor of venture capital instead of all other financing choices, there are some disadvantages to pursuing VC funding – namely, giving up some portion of equity. It all depends on the type of business you want to build.
The clear benefit of venture capital funding is that it will help you realize what about your business is working faster than if you continue to bootstrap your way, never iterating your product and ultimately running out of money before your vision is actualized.