The entrepreneurial ecosystem of today is a sucker for buzzwords and trends. Whether you’re an active member of a startup community or you’ve just seen HBO’s Silicon Valley, you know that many new companies tend to turn straight to venture capital when they’re getting off the ground.
But is VC the right choice for your business? Here’s what you need to know about venture capital to figure out if it’s your best alternative financing option.
What Exactly Is a Venture Capital Fund?
A VC fund is one which is professionally managed and designed to invest in early-stage ventures. Venture capitalists generally invest more than 3 million dollars with the goal of exiting after giving the company at least a decade to grow (10+ years). These cash injections can project a company to incredible levels of success in a short period of time.
Importantly, VCs don’t simply hand over the money and go looking for their next capital investment. Most of the time investors take an active role by providing guidance and expertise, and being involved in making some company decisions. This is an important advantage which could increase your odds of succeeding. Investors usually have a lot of experience, and can help you steer clear of wrong business moves.
It’s important to realize that not many companies will make the cut when investors are on the lookout, so you have to be realistic. VC funds are known as high risk/high reward, and that applies even more to the investors than it does to you. Not all investments pay off, so investors tend to be very picky when millions of dollars are at stake.
Beyond the Hype, Is VC Funding Right for You?
VC financing has given birth to some of world’s most successful startups (Facebook and LinkedIn to name a couple). And there’s one important element of VC’s definition to emphasize — it’s a professionally managed fund.
VC funds are run by seasoned professionals who know how to weigh risks. If your venture isn’t going to look like a solid bet from the outside, you’re likely going to be passed on. Forbes calculated that the probability of a new business obtaining VC funding in the US is very, very small.
On the other hand, venture capital in Canada has started to gain a lot of popularity. The government is even trying to encourage the growth of the VC sector. If you have an experienced team and a solid business plan, venture capital is probably a great choice for you.
But know that failing to understand where you stand realistically can lead to huge wastes of time and resources, so don’t make this mistake. If you’re still working on building credibility and forming connections, you can always consider the ever-growing world of alternatives instead.
Venture Capital vs. Angel Investors
The main VC competitor for an early stage venture is an angel investor. The biggest differences are that angel investors:
- Will likely invest a smaller amount of money (as little as $50,000)
- Will be able to make the investment much faster
- Won’t require direct control (eg. a board seat)
The flip side is that angel investors will be looking to make an exit within a few years (usually 5–10 years). This can be an advantage or a disadvantage depending on your business strategy. If you’re starting a company to see how it goes with a wildly different pack of ideas in your back pocket, angels will probably work better for your leaner strategy that VCs.
It really all boils down to your business plan. The contents of that plan should tell you what form of startup financing is best, both in terms of business strategy and chances of acquisition. Frankly, if you’re right for an angel investment, you’re probably not right for VC, and vice versa. This should make the process of choosing where to put in your time and effort relatively easy.
If you’re looking for a smaller investment, especially if you know you can repay it in a short period of time, P2P lending or crowdfunding loans may also work as financing alternatives to support your new business’ growth.
Before You Look for Funding, Consider Your Goals
When it comes to choosing the right financing for your company, there’s a lot you could learn from any run-of-the-mill spiritual teacher: know yourself.
Cutting out the hype and the buzzwords to really understand the core goals of your company is the essential step to making the right decision. If you can do that, the rest should follow.