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The pros and cons of taking venture capital funding for your startup

In 2022, venture capital (VC) firms raised a record-breaking $162.6 billion. Venture capital investment can be an especially attractive way of obtaining significant capital for your startup and taking it to the next level. But what is venture capital?

VC is a type of funding that involves private equity financing that is provided by several sources such as investment banks, venture capital funds and private investors. It typically comes in the form of an equity-based investment in a startup. 

It is typically given to startups that are seen to have potentially lucrative long-term growth potential or have got off the ground quickly and seem likely to expand.

VC is becoming an ever more popular – and nigh on essential – form of funding for startups. In recent years, they have become sources of capital as important as capital markets or traditional bank loans. 

Taking VC funding can be incredibly advantageous for young and developing startups. However it is not without its risk. Below is a list of the pros and cons of VC funding for startups.

Pro: Significant amount of funding

If a startup is entering a big or medium-sized market, it will often need money now or need a large sum of capital for production development, marketing and scaling. Taking VC funding will provide a significant cash infusion for the startup, allowing it to get off the ground.

Con: Too much funding can spell disaster

This may seem like a ridiculous idea. How can a business have too much money at their disposal? 

Well, if the startup receives a short-term loan or cash injection, but doesn’t know how exactly to allocate it, it could end up being unable to leverage the investment. Does it have the staff and infrastructure to handle the potentially large influx of customers that a big funding package could entail? Does it have the infrastructure to scale at an accelerated rate? If not, the situation may spin out of control quickly and productivity could crumble.

It’s wise for startups to really think about whether they need large VC funding. With too much finance without proper planning, can lead to ruin.

Pro: Partnership

As well as a significant cash boost, VCs also provide what are known as ‘intangible assets’. These come in the form of introductions to business and subject experts, and networks that can provide significant strategic help for a budding startup. 

These intangible assets can provide expertise in sales, marketing, development or advertising, for example. Because startups are often cash-strapped, they may not have the budget to bring in this kind of expertise by themselves. Taking VC funding may mean access to key mentorship and guidance opportunities. 

Con: A loss of control

VC funding may not involve a traditional loan agreement, but it does involve giving up a portion of ownership in the form of equity dilution. So, what is gained in mentors and advisors, can be ceded in overall control of your business. 

The advantage of embarking on a startup venture for many is that sense of independence and control over the fate of the business. This will inevitably be compromised once you introduce VC funding. However, not every business can afford to retain this independence.

Con: A tighter schedule

A startup that receives a large injection of capital through VC funding, may have avoided the fundraising cycle for the next few years. This frees up time and resources for selling. This is great, but funding from VCs often means there is a tighter schedule to satisfy investors’ expectations on returns.

Often, the time saved avoiding the fundraising cycle is spent rapidly trying to grow the business in order to meet these expectations.

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