Venture Capital Advantages and Disadvantages

In this age where start-ups are on the rise, the importance of business funding is greatly felt. A company that has the potential to grow needs a certain amount of investment in its initial phase to support growth and business activities. These companies cannot raise funds from the primary market as they don’t have access to share markets. In such cases, the young entrepreneurs depend on venture capitalists, seed funding and bank loans for procuring funds. Investors, after assessment of the business prospects, invest their money in start ups, small and medium sized business or enterprises that tend to have long-term growth. This capital is known as venture capital and the investors are known as venture capitalists.

What is Venture Capital?

The term Venture Capital is generally used to denote an individual or institutional investor who provides investments or risk capital to small private businesses. Venture Capital is a private investment made by investors to new businesses like start-ups and small and medium size enterprises. This type of investments generally involve procurement of funds from wealthy investors and high net-worth individuals that is pooled together by dedicated investment firms. Venture capital investment is also known as risk capital financing as it involves the risk of losing money if the venture does not succeed. The capital investment is done in exchange for equity stakes in the business rather being given as a loan.

Features of venture capital

Discussed below are some of the important features of Venture Capital:

• The primary focus of Venture Capital investors is on early-stage investment. However, it can also involve expansion-stage financing.
• Often, equity stakes of the enterprises or companies that are funded by the Venture Capital Funds (VCF) are purchased by them.
• The Venture Capital funding is made on high risk projects which ensure a high amount of profits.
• The VCFs also help in developing new products and services by acquiring the latest technologies, improving the operational efficiency of the company.
• This type of funding opens an array of opportunities for better networking of the companies and helps them grow by establishing better business connections.
• Often, the Venture Capital investors have the right to participate in the management of the company.
• Venture Capital investments are made in innovative projects that have a potential for growth in the future. The venture capitals earn a high amount of returns when these business ventures succeed.

SEE ALSO: Venture Capital In India

Venture Capital Advantages and Disadvantages:

Listed below are some of the advantages and disadvantages of venture capital investment:

Venture Capital Advantages:

• Business expertise: The business knowledge of venture capital investors will help the aspiring young entrepreneurs having little expertise in dealing with various dimensions of a business. The start-ups and budding entrepreneurs can seek guidance and consultation for making better decisions in key areas of business. Many venture capital firms have a team of trained professionals who assist companies in key areas of business management.
• Additional resources: Venture Capital firms are a source of constant support for the start ups. The start-ups can seek their advice in a number of critical areas, including legal, tax and financial matters. A Venture Capitalist firm can provide active support that enables the business to make a better decision and grow faster.
• Business Connections: A well-established venture capitalist has many business connections and is linked to many business communities. This helps new businesses grow faster without incurring additional cost to develop their connections.

Venture Capital Disadvantages

Loss of control: there are certain drawbacks related to venture capital funding. In many cases, the venture capitalist partners will want to be involved in business decision making and exercise complete control. The reason for this involvement is that the Venture Capitalists have parked their funds in these businesses and they do not want to end up losing money. In such circumstances, they may not be willing to invest any additional capital even if it is required for backing up the business.

Uncertainty: depending on the size of shares owned by the venture capitalist firms, which could be more than 50%, you might lose management control. Sometimes, this also leads to giving up ownership in your own firm.

Venture capital in India provides the much-needed risk capital that is required for the small and medium businesses to grow. Venture capital funding has ensured newer avenues and expansion prospects for start-ups. Businesses can focus on growth and once they avail the necessary funds from venture capital.

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