No matter what type of business you're looking to start, it's going to cost money to launch and grow it. While some entrepreneurs self-fund or borrow, startups that require a larger sum often turn to venture capital (VC) firms for an investment.
Many entrepreneurs think VC funding is an ideal path, especially when they've seen investors on shows like ABC's "Shark Tank" and BBC's "Dragons' Den" offer multimillion-dollar deals to everyday entrepreneurs. However, the road to an investment isn't as easy as TV makes it out to be – and it's not right for every startup.
If you're wondering whether your business should look for venture capital, there are a few important things to consider first.
What is venture capital?
Typically given to companies that investors believe have long-term, high growth potential, venture capital is funding that investors give a startup (usually no less than a few million dollars) in exchange for equity in the business and/or the right to influence major business decisions.
After an average period of five to eight years, VCs expect that the company they've invested in will have matured enough to go public or get acquired. At this point, they'll seek a return on their initial investment.
[Read: Need to Raise Business Capital? Know These 5 Funding Rounds]
For many entrepreneurs, the only thing standing in the way of explosive business growth is money.
The pros and cons of VC funding
According to The Hartford, here are a few important advantages and disadvantages of accepting a venture capital investment:
Pros:
- Invaluable expertise. You'll receive business expertise from your investors as you grow your startup.
- Constant support. VC firms often provide active support in critical business areas like legal compliance, taxes and human resources.
- Network expansion. You can benefit from your investors' vast network of business connections, which could spur huge growth opportunities for your company.
Cons:
- Scrutiny. Every aspect of your business will be under close examination, and you'll need approval from your investors to take your company in a new direction.
- Loss of control. Depending on how much equity you give away, you may lose majority ownership or control of your business.
- Added stress. You'll be under tremendous pressure to grow quickly enough to satisfy your investors' ROI expectations.
When to seek venture capital
If you're convinced VC funding is the way to go, here are four ways you can know if you're ready to start pitching investors.
You want to scale your business quickly.
For many entrepreneurs, the only thing standing in the way of explosive business growth is money. If you want to become profitable quickly, a round of venture capital can help you ramp up in areas like hiring, production and marketing right away.
Your business has what VCs are looking for.
As finance expert Ryan Himmel writes, your company has to be "fundable" if it hopes to receive investor capital. The three key ingredients, he says, are "a large market opportunity, an experienced management team and a clear way to monetize following the investment." In other words, you need a viable product with proven market potential and a steady path to profitability.
You're comfortable with operating under a microscope.
Because VCs expect a relatively quick return on their large investment, your investors will carefully evaluate everything you do through the lens of profitability. There's a much higher level of scrutiny involved when you're reporting to a board of investors, so you'll need to have meticulous processes for tracking and reporting metrics for all areas of your business.
You're prepared to face a lot of rejection.
It can take months or even years to get a "yes" from a venture capital firm. Chances are you won't get funded on your first few tries, so you need to be prepared to keep pitching.
While you may think you're ready for a VC investment, it's important to get your timing right. If you meet the above criteria, you're on the right track. If you're not quite there yet, keep working on building your business so you can gain enough traction to catch a VC's attention.
[Read: The Step-by-Step Startup Guide: How to Start a Business]
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
