If you browse through the financial pages, chances are you’ll see a new startup hitting it big thanks to an investment from venture capital. With all that money splashing around, is this a realistic source of financing for your small business? It could be, but only in very specific situations. We cover what you should consider before applying for small business venture capital.
What Is Small Business Venture Capital?
A venture capital (VC) fund looks to invest in small and medium-sized businesses that have the potential to grow very quickly with some extra money. For example, when Facebook started out, they used VC financing to spread the social media platform throughout the world, according to Fortune. The venture capital fund buys into these companies early so they can sell their ownership share later for a big profit.
Qualifying for Venture Capital
Venture capital funds aren’t for the typical small or medium business that only operates regionally, even if it’s a profitable idea. According to Forbes, you need to have a business that can scale quickly and potentially become huge, worth $100 million or more. The show “Shark Tank” highlights the types of businesses that are potentially fundable, like an app that could go viral or a new home appliance that every American might buy.
In addition to meeting venture capital risk and profit standards, your business also needs to be fairly established to apply. You’ll need to have developed your product, launched your business and shown that you can make money. You’ve proven the concept on a small scale and with venture capital, you can become much bigger.
Advantages of Venture Capital
With VC funding, you can raise a large amount of money quickly; even entry-level VC rounds can be for millions of dollars. VC funds are financed by experienced investors and mentors who could help guide your business. As part of the arrangement, you’d need to meet regularly to discuss your progress and plan how to hit your next milestones.
Finally, successfully closing a VC round could give your business publicity. It’s not easy to qualify, so being picked by a top-tier fund shows your company is on to something.
Drawbacks of Venture Capital
Even if you think your business might be eligible, qualifying for venture capital is extremely difficult. First, you need to be in an area with an active VC community, like Silicon Valley or New York. Then, you’ll need to go through a lengthy application process with lots of meetings and possible rejections from different funds.
Even if you qualify, there will be some strings attached to the financing. You’d be giving equity to the VC fund, which means you won’t receive all future profits going forward. Another venture capital risk to consider is that they’ll also take some control of the company. They may even fire you if you fail to hit the agreed milestones. Finally, the VC fund will expect you to sell your company at some point in the future, so they can cash in their profit.
How Else Can You Raise Money?
If your business can’t qualify for VC funding, or you need some financing now to reach that point, there are other ways to raise money. Rather than dealing with a professional fund, you could try finding a local angel investor. They would be more willing to put money into a smaller regional business. But you’d still need to give up equity and partial control of your company.
Another option is to take out a small business loan from an alternative lender. They also have easier standards than the traditional lender and let you raise money quickly, within a few days. Then, if you do end up qualifying for venture capital or another type of funding, you can pay off your loan.
While venture capital might get the biggest headlines, it’s not the way the typical business raises money. Even if you think you’ve got a shot at VC funding, be sure to consider your other financing options as well.
