When trying to start your new business, you might be short on cash. It’s not uncommon for start-ups to require a little cash infusion in their early years to get themselves off the ground and generate a profit. However, sometimes a traditional business loan just isn’t the right choice for you. You might need more money, need longer loan terms or be looking for a different type of arrangement than standard loans offer.
That’s where venture capital comes in. Finding venture capital funding or working with a venture capitalist (VC) can help you secure the money you need for your business. In this post, we’ll look at how venture capital works, where to get funding and the benefits this route has for your business.
How Venture Capital Works
Venture capital is a unique funding method that helps start-up businesses fund their operations as they get off the ground. In this situation, there are two parties involved: the business owner(s) and the VC.
Business owners seek out venture capitalists to help fund the initial stages of their business. They might need a cash influx to start marketing and advertising efforts, turn a prototype into a product or develop software. Venture capitalists supply this money as part of an investment contract.
There are many different ways to approach a VC contract, but a few popular options include:
- Business partner – the VC provides capital in exchange for a role as a business partner, whether active or silent.
- Profit sharing – the VC provides capital with the understanding that they’ll receive a percentage of the profits when the company starts making money
- Loan – the VC provides capital as a loan to the business owners, which will be repaid with interest when the business gets off the ground
Funding Sources
If you can’t find a specific VC to work with or there are no good options, you can also look to venture lenders. These are institutions that specialize in venture debt financing. This process is very similar to working with a VC, except you use a lending entity instead of an individual or firm.
Venture loans are a great option for getting cash quickly to do things like purchase equipment, research and development or expanding your operations. They’re available to businesses that haven’t proven revenue generation yet, which means you can get a loan early on in your business’s life.
The primary downsides to this type of funding is that it typically comes with higher interest rates and demands quicker repayment terms. So although it can get you up and running, you need to ensure you’ll be able to generate enough profit to start repaying the loan quickly.
Benefits of Working with a VC
Now that you understand how venture capital works and what your options are, you’re probably wondering why so many people opt to work with a VC or VC firm. There are a number of benefits to partnering with a VC to fund your business, including:
- Can get a large influx of money
- Help mitigating business risks
- No monthly payments
- Experienced leadership and advice
- Added publicity for your business
However, as with most options, working with a VC isn’t all great. There are a few downsides to consider as well:
- Finding investors can be time-consuming
- Funding is highly competitive
- The founder’s ownership stake is reduced
- The business might grow faster than you’re prepared for
It’s important to weigh the pros and cons of choosing venture capital before you make your final decision. Consider your other options as well so you can determine the best path for funding your start-up that offers terms you can reasonably accommodate.
Starting your own business is an exciting first step to being your own boss and building a lasting legacy for yourself. Consider if venture capital is the right way to fund your start-up! It offers lots of perks you can’t get with traditional loans and more flexibility than you might think.
