Your business idea is brilliant! It’s growing fast in a fast-growing industry (i.e. technology, health, etc.), but you need a major player with some major dollars to help with funding your business to keep that growth on track. You know where you want to go with your business, but the financial outlay is much more than you can generate. What you need is a Venture Capitalist…the next funding option we want to discuss.
There are real fundamental differences between courting a venture capitalist and seeking funding with an angel investor.
Let’s keep in mind right from the start that we are talking about millions of dollars, not hundreds of thousands. For that kind of risk, you can expect that a Venture Capitalist is often going to want a majority stake in the ownership of your company. This is a significant equity dilution for the company’s founders.
The Goal of the Venture Capitalist
Although you can conceivably gain several million in investment dollars to help keep your company growing and alive for 6 months to 2 years, it’s important to keep in mind that you are definitely going to give up some control to investors. The goal of the Venture Capitalist is to see you get bought out within a 3- to 4-year time frame. It’s the goal of VC investors that they…and everyone with a vested interest in the business…get to walk away with a lot of money in their pockets. There can be no doubt that a Venture Capitalist is looking for you (your business) to be successful.
Keep in mind that once a Venture Capitalist comes into your business, you (as the founder) only get money out through an IPO or acquisition. Profits from the company are now tied to the business operations.
Control, as alluded to above, should be an area that is given a great deal of forethought while looking for further business funding. Having a Venture Capitalist on board (and on your board) can require a lot of you in the way of hand holding, because the VC will want to have a say (with voting rights) in what happens with your company. You want to make sure you are partnering with people truly in line with your mission and vision. If your business has a “socially-based” vision, it can prove to be especially heart wrenching if the VC investor doesn’t share that same vision. Be aware!
Beware the “Zombie” Scenario
You must also beware of what is called the “zombie scenario”. This occurs when a moderately profitable company is without a good enough growth curve, which will allow for an IPO ending or a high-priced acquisition. A company such as this, with initial Venture Capitalist support, would no longer be of real interest for additional investments, basically causing the business to stall out. Stall outs cause a real dilemma for Venture Capitalists in that you are now looking at a problem with your exit strategy.
The Venture Capitalist Funding Option is the lowest risk path to take if your business idea is unquestionably good and/or your company is already experiencing meteoric growth and potential. It can provide you maximal resources, along with great advice and network opportunities.
You may want to be considering where in the spectrum from Boot-Strap funding to VC Investors your business falls. In our next couple of blogs, I want to get more in depth on traditional start-up funding and what many of those options are.