Downside of Venture Capital

One of the tremendous downsides of working with a venture capital firm, is that they are ultimately, again, going to take a 60% to 80% equity interest in your business as they continue to make investments in your company. This, ultimately, means that you're going to have to cede control to the investment firm that you're working with as it pertains to meet venture capital that you need in order to develop your business operations. Time and time again, we have found among a number of entrepreneurs that they enter into venture capital agreements without fully understanding that there is going to be a substantial amount of control ceded to these firms as they continue to provide you with the capital you need now on initial basis but also on an ongoing basis as your business expands. Again, we strongly recommend that you work with a number of different business advisors say that you can clearly understand the nature of working with a venture capital firm if they're willing to entertain a potential investment for your firm. .

 

This, it is one of the toughest part of obtaining venture capital for your business in that the entrepreneur had it has worked so hard to develop a new business venture is going to have to give up a significant amount of control over your business with the intent of ultimately generating a substantial return on their investment by sourcing third-party capital. Much of the venture capital firms that source investment from third parties with the intent to generate 20% of the profits are generated through their investments, you can anticipate that you, as the entrepreneur, will also receive approximately 20% of the profits that are produced not only for the ongoing cash flow business but also through the ongoing increased valuation that will occur as your business expands. While this may seem as a plus for working with venture capital firms can quickly turn into a nightmare if the venture capital company that you're working with find that you are not a suitable manager for their investment. It is extremely important to note that in many venture capital deals, the firm is involved with providing you with the financing that you need to ultimately view as the Chief Executive Officer very quickly due to the fact that, again, that they owned a majority interest in your business. This is one of the things you need to heavily consider before working with any type of venture capital firm that is looking to make a significant investment into your business either initially or foreign ongoing. On a quick side note, we recommend that you continue to review the number of different articles that TheFinanceResource.com has produced as it relates to working with venture capitalists both in a positive capacity as well as a negative capacity.

 

Again, there are a number of things that you will need to consider as a venture capital firm determines whether or not to work with you. For most, most venture capital firms do not want to work with startup companies that are seeking to develop a standard business that is all you can developed by a number of other different market agents out there. Typically, most venture capital firms are seeking to work with companies that own proprietary technology, or have a highly unique concept that is extremely economically viable as it pertains to developing a new business with the intent to sell this company for a significant price to earnings multiple to a third-party directly form or through an initial public offering. In regards to initial public offerings, this will be discussed this in further detail as many entrepreneurs often feel at this is the pinnacle of success as a relates their business. However, nothing could be further from the truth as it relates to divesting your business for a significant price earnings multiple as it pertains to working with a venture capital firm. Due to the fact that he large amount of the capital that has been available for initial public offerings had dried up, a number of different venture capital firms have become more focused on selling businesses to third-party private equity firms, your competitors, and other entities that are looking to enter the specific industry that you are currently operating within. Again, this is one of the primary downsides to working with a venture capital firm is that if they receive an appropriate offer for your business quickly turned to sell the company to this entity with your consent. In having received an investment from a venture capital firm, the control as it pertains to how they intend to divest the business for a significant premium is up to the VC. If, the venture capital firm, receives an appropriate offer, they may sell business to a third party without question. Again, this is one of the primary downsides of working with a venture capital firm in that you have very little discretion over how your business is managed as it relates to the ongoing operations of business. Secondly, when you work with venture capital firms, and they decide to sell your business to a third party you may end up in the position that where you are unemployed. Although, you may have received a substantial amount of money for the business you have developed, you may not have developed a firm has to have you felt it should have been properly built. This, again, will be one of the themes through our discussions as it relates to the downsides of working with venture capital firms.

 

As we discussed in our article pertaining to the benefits of the venture capital, the things that you will have access to is a tremendous as it pertains to developing and expanding your business over a significant period of time. However, this comes with a substantial downside in the fact that again, you're going to sell a significant portion of your business while giving the venture capital firm a substantial amount of control over how your business operates. As we discussed earlier, one of the most common issues that comes with obtaining capital from a venture capital firm is that in the event that you are under performing as per their standards then the venture capital firm can quickly replace you with a different manager that is able to more effectively and more aggressively expand the business the time frame that the venture capital firm is looking to expand and divest their investment. As such, you should be fully prepared, as at the entrepreneur that you will need to aggressively expand your business when you receive capital from a venture funding. It goes without saying that after a 1 to 2 year time frame if you are not conforming to the standards set forth by the venture capital firm then you will be quickly replaced by a third party that is able to expand the business as seen fit by the venture capital investment company. As such, if you were not able to obtain the 25% to 35% the current on investment that is required on a year on year basis by a venture capital firm they may be in your best interest to seek other forms investment including traditional business loans, SBA loans, or investor financing that is more appropriate for your business. A qualified certified public accountant is able to make a determination as to what type of investment is best for you depending on your business his current circumstances. Prior to engaging any type of capital raising activity we strongly recommend that you seek out the advice of a trusted business consultant or CPA that an appropriately guide you as to what is the best method of obtaining capital you need in order to expand work well your business venture.

 

As we have not discussed earlier, there is a significant difference within private investment as it relates venture capital and private equity capital. Historically, venture capital has been reserved for businesses that specifically bar start of companies that have very promising pieces of the technology, unique business concept, with unique business models that will generate a substantial amount of income over 3 to 7 year timeframe. However, if you're already a business that is an operation that in your best interest to work with a private equity firm for merchant banking firm that can provide you with a financing that unique or to aggressively expanded business the while maintaining a significant amount of control over how your business operates. Working with private equity firms and merchant banking firms that provide you with a much better benefit as it relates to maintaining a significant amount of control over your business will concurrently developing an extensive amount of love yourself for the ongoing operations of your company. If these concept relating to venture capital, private equity, merchant bank and private investment is foreign to you then we strongly recommend that you continue to review articles as it pertains to these different types of capital and how they can be used to finance your ongoing business operations. In some of our other articles are also going to focus on how you can effectively use hybrid forms of investment so that you do not to deal with as many of the downside issues as it pertains to obtaining financing through a venture capital firm.

 

In one of the more recent articles have we have published as it pertains to the upside of obtaining venture capital, we've discussed a new type of financing that is being used by the new businesses on an ongoing basis that has allowed the venture capital firms, private equity firms, and other financial institutions to obtain a very strong occur on their investment in all seating is very limited amount of control for your business. This type of financing is known as royalty-based financing and it operates in a similar capacity to both that of a business loan as well as a equity investment into your business. Primarily, if you decide to focus on using royalty-based financing then you should beware that you are going to need to plan to operate a very high margin business as a certain percentage of your monthly revenues are going to need to be disbursed to beat capital firm that is providing you with the financing that unique. In exchange for providing a venture capital firm with a smaller equity percentage, again, you will be required to provide them with an ongoing stream of income based on the revenues of your business on a month-to-month or quarter to quarter basis. One of articles that pertains to general business planning, you can find it in-depth analysis of royalty-based financing and how it relates to acting as an alternative to seeking venture capital.

 

In our next discussion here to focus on the issues as it relates to private placement investors, the nature of private placements, and how you can raise capital on your own in order to obtain in order to effectively explain your business to work develop your new entrepreneurial venture. Again, outside of using a venture capital firm, there are a number of different alternatives out there that you can use in order to obtain the financing that you need without having to give up a substantial amount of equity within your business with a substantial amount of control as it pertains to the day-to-day operations of your company.

 

Thanks again for tuning in as it relates to articles pertaining to venture capital, and we look forward to continuing to provide you with new and insightful information as it relates to the benefits of using venture capital, the downsides of using venture capital, and the alternatives that you can use as it pertains to finance in your ongoing business operations.



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