What should you know about venture capital?

Venture capital, a type of equity funding, is essentially an investment that combines a life insurance policy and mutual fund shares. With this option, the investor is shielded by the protection of the insurance policy (collateral), and also has the added bonus of growth potential of the mutual fund. The term equity funding is the exchange of money for a share of business. This allows business owners to obtain funding without incurring any debt, but there are potential downsides of venture capital all entrepreneurs should be aware of.

Venture Capital Myths Dispelledr
Many startup companies in search of funding often consider venture capital as a feasible solution-but this is often not the best choice. While venture capital may be viable for some businesses, there are many factors to take into consideration prior to deciding to use this type of funding.

When in search of business funding, the end goal of obtaining funding is often the only factor given consideration. More importantly, business owners must realize that the method in which funding is obtained will have both positive and negative short-term and long-term consequences, depending on the ultimate end goals. As previously stated, venture capital is typically invested in a company in exchange for shares in said company. Depending on the amount of capital received, that could mean the business owner loses ultimate control over the business. When the investor and business owner have misaligned goals, this could translate into huge problems. Venture capitalists invest in companies with the most potential to realize extreme growth in hopes of an eventual sale of the company. If your end goal does not include the eventual sale of your company, or there is a chance that you will receive a nominal return on investment for the sale of the remaining shares of your company, an alte
ative funding option should be considered.

Another misconception is that venture capital is somewhat easy to receive. It takes time to contrive an affective funding proposal and to find investors who are actually willing to read and consider your proposal. Despite the substantial amount of time spent on the funding proposal process, the majority of businesses never actually receive venture capital, because in spite of how innovative your business is, venture capitalists have very high expectations and aim to ensure high yields on their investments-sometimes 30 percent or higher. This brings us to the high cost of venture capital. Unlike debt funding, there is no amount that must be repaid, but with a 30 percent return on investment, along with salaries and bonuses, venture capital becomes very expensive. While this money may not necessarily be coming from your wallet, it is coming from somewhere-your business.

Before deciding if venture capital is right for your business, consider the following advantages and disadvantages:

The advantages of equity funding are as follows:
• You do not have to pay back your investors even if your company goes bankrupt
• Business assets do not have to be pledged as collateral to obtain equity
• Businesses with sufficient equity will look better to lenders, investors, etc
• Your business will have more cash available because it will not have to make debt payments

The disadvantages of equity funding are as follows:
• You will have to relinquish ownership and a share of your businesses profit to other investors
• Other owners may have different ideas than yours on how businesses should be run
• Payments to investors in C-corporations are not tax deductible