12 July 2011

Beware of VCs

VCs are eager to fund new and emerging companies in various sectors. Entrepreneurs are also looking forward to grab opportunities to get such funding for starting their business or for expansion of the existing. It is quite difficult for them to get loan from banks, as they do not have sufficient operating history to qualify for traditional loans. But, is it wise to raise funding from VCs? If so, how safe is it for your health and your business?

When a VC funds your company, you will not be the sole owner of the business and may lose control. Venture Capital is not like a loan, which you can pay off after a certain period of time, rather Venture Capitalists take stake in your company, i.e., a part of ownership of your company to control it. They will be the part of the business until your company is acquired by someone or goes public.

Some Venture Capitalists and Angel Investors may invest in your business, which may be just a concept. For investing a small amount, they might take 60 percent ownership of your company and put in their own management team. And if they find the idea viable enough to commercialize it to earn more profit, they will put in more capital by taking yet more equity.

One of the other problems that an entrepreneur faces is they often are giving up many key decisions in operating their company. Venture Capitalists firms are looking for short-term gains, may be 3-5 years, but a founder has long-term vision for his business, which results in clash between the two. The Venture Capitalists are also not willing to sign the non-disclosure agreement due to the legal corollary of doing so, which can put the entrepreneurs idea at open risk.

Venture Capital funds are not meant for all. They focus on high growth potential companies. So, it is always important to analyze the pros and cons of approaching a Venture Capitalist. The start-ups should opt for such funding only when it is in the verge of expansion in terms of market share or inventory. Otherwise, it is more advisable to 'bootstrap' your company.