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Understanding venture capital funding

 Article by Darlene Menzies, CEO of Finfind.

Are you a start-up or small business with an idea, product or service that addresses a large market need? Do you believe your business has the potential to achieve high growth over the next 5 years? Is your business currently struggling to survive and grow due to lack of funding? If you can answer yes to these questions, then venture capital could be a good funding option for you to explore.

Venture capital (VC) is a form of funding that is provided to new or small, early-stage, emerging businesses that are considered to have high growth potential. Venture capital firms invest in early-stage companies in exchange for ownership in the business they invest in. VC’s take on the risk of financing risky start-ups in the hopes that some of the companies they invest in will become very successful.

Getting money from venture capital companies is not like taking a loan

Venture capital is not like taking a loan; with VC funding the money doesn’t have to be paid back. Instead, the money invested is given to the business and in exchange the VC is given a percentage ownership share (called equity) in the business. The percentage equity received by the VC is based on business’s perceived value. This value is usually calculated by looking at projected future earnings which are based on a number of reasonable assumptions.

Many small business owners who are not familiar with the ins and outs or the benefits of VC funding are typically very concerned about losing full ownership of their business. While this is a natural initial fear, don’t let it stop you from weighing up the options.

The reality is that without the money you need to invest in resources (staff, equipment, technology, marketing etc.) that is needed to grow your business, it could mean you land up owning 100% of nothing rather than a smaller percentage of a really successful, profit-generating business. VC funding could be an excellent funding option to see you and your investor make lots of money.

Besides the money VC’s invest, another advantage of bringing VCs on board is that you will have access to their business expertise. Most VCs are experienced business people and they can be a valuable source of guidance for key strategic decisions. You’ll also find them useful for practical issues such as financial management or human resource management. Once VCs have invested in your business, it is in their interests to help you in order to ensure the business grows.

Look for more than money when it comes to choosing a VC partner

Expanding your business network and getting easy access to decision makers is a vital part of growing your business. This is another area where VCs can provide assistance. Typically, VCs are well-connected people with a wide business network and you will be able to tap into these connections.

As with every major decision, there are also possible drawbacks that you need to consider before making a decision on parting with equity in your business.  Once you receive equity funding, you will be accountable to the investors in terms of finances and key business decisions.

VCs usually want to sit on your board and receive regular reports on the state of the business. They require financial controls to be put in place to ensure that large financial commitments must be jointly authorised. You will no longer be able to make major decisions without consulting your funding partners.

But at the end of the day, the real question to ask yourself is whether you can afford to fund the business growth on your own. If the answer to this is no, then venture capital is a good avenue to explore. After all, the thought of being a partner in a large successful business isn’t such a bad deal.

Finfind is a proud Partner of the NSBC.