So you have a great idea for a start-up, you have a committed and talented team to head up the company venture capital investment, and the market is there for the taking. All you need now is the initial investment to finalise your innovation and you’ll be set for world domination.
At this stage, many entrepreneurs will start looking for a business loan, but this tactic has some obvious drawbacks. First of all, the bank or financial institution you approach for your loan may decide that your idea is not well-supported enough to invest in, and will refuse the loan. Even worse, they give you the loan, but your idea really wasn’t as crash hot as you thought, leaving you with a failed business and a huge debt to pay off.
There is another option, one that often does not rely on traditional credit ratings and will not land you in debt if things go pear shaped; we are talking about a venture capital investment.
What Is a Venture Capital Investment?
A venture capital investment is a short-term investment that helps a start-up or small business to achieve specific goals in the early stages of development. In return for their investment, the venture capitalist (VC) receives a stake of the company, which they will later sell at a strategic point in the company’s future.
For instance, seed financing, a form of venture capital investment, is typically the very first official funding that a start-up receives. It is intended to help a start-up with the various tasks required in the early stages before they become fully operational, such as market research and product development.
Seed investments are considered higher risk than other kinds of VC investments that occur later in the company’s life cycle as the company has not yet had the chance to prove itself. However, seed investors are able to acquire a larger share of the company than an investor would receive for the same amount later on. The more risk the VC takes on, the higher the eventual ROI if the business succeeds.
A VC investment can be issued at various stages of a company’s development and may even take the form of expertise or other kinds of support in place of actual money. A VC investor can be a wealthy individual, a business, or a financial institution like a bank. The essence of a venture capital investment is that it is a short-term investment provided somewhere in the early stages of development to a business that the investor sees as having high growth potential.
The Advantages of a VC Investment
Unlike a business or personal loan, a VC investment is a form of no-debt financing. This means that you do not need to put yourself in debt or pay interest rates for the amount staked in your company. This makes VC investments preferable to loans in many instances.
Are There Any Downsides?
The principal drawback of a VC investment is that the investor receives a stake in your company, giving them some control over the direction of your business. They will want to make a return on their investment as soon as possible and will generally not be thinking of the long-term business goals. So it is important that you understand their interests and objectives before accepting their investment.
However, if you can agree on the terms and negotiate a good deal, VC investments can be of enormous mutual benefit to all parties.
Contact Think10 to Learn More About Venture Capital
Is a venture capital investment the right choice for your business, and where would you find an investor? Get in touch with Think10 today to discuss opportunities for your start-up.