All About Venture Capitalists: Advantages And Disadvantages

by | 15 Mar, 2022

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Everything about Venture Capitalists and most importantly advantages and disadvantages. We are going to cover it all in this article.

Are Venture Capitalists a Good Option for your Business?

Investors come in many different forms and offer varying degrees of support, and depending on your business type (e.g. if you’re a sole trader or an LLC), you’ll probably look for different types of investment. Across your travels you may have heard of Venture Capitalists (VC), and may be wondering if they are the right fit for your investment needs. Let’s take a look at what they are!

What Exactly Is a Venture Capitalists? (VC)

A Venture Capitalist is a private equity investor or group of investors that inject investment into businesses with a high potential for growth. They do this in exchange for an equity stake in the company, e.g. a share of the company’s potential profit. This includes startups or supporting smaller existing companies that are looking to grow and expand but lack the necessary means to do so.

So Who Do Venture Capitalists Help?

It’s worth noting that although venture capitalists are in the business of investing and will help out startups and small businesses, they will only do so if they recognise a potential for a high return on the investment. This means they won’t usually be funding a startup right from the moment of its creation – you’d usually expect them to get involved somewhere down the line, particularly when a company has demonstrated its potential and had some marginal success and is at the stage where they’re looking to get bigger and more commercial. VC’s usually look for businesses with a unique service or product with a competitive advantage and a potentially large market, as well as a strong management team driving the company.

Where Does Venture Capitalists Money Come From?

Unlike Angel Investors, venture capitalists aren’t usually just individuals looking to take a chance on an entrepreneur with their money. They are usually part of venture capitalist firms, often formed first as limited partnerships (LPs) that are made up of partners that invest in the VC fund. This fund is known as a pool that is managed by a team or committee that makes the overall important decisions on what to invest the combined capital in. This team identifies potential businesses and startups to invest in and then exchanges their large funds in exchange for a pretty sizeable equity stake.

In this sense we can see that being a venture capitalist is very much a full time job. Where other types of investors use their own money and choose to invest at their own pace, a VC fund is pooled together from many individual investors and is almost always active, as it essentially functions as a business.

Are There Risks?

Yes. However, they’re not only reserved for you! The act of investing is risky by nature, and the likes of large VC funds being invested into growing companies is about as risky as it gets. There is a notable high potential for failure when supporting up and coming companies, and therefore a large potential for losses, too. There is always a high degree of uncertainty with any new business, no matter how solid of a start they have, so the committee in charge of the VC fund always have to take a gamble. However, when the companies do grow and are successful, the amount of returns can be massive, especially as venture capitalists usually take a sizeable chunk of equity in said companies.

Are they a Good Option for my Business?

Now, onto the real question – are venture capitalists the right kind of investors for your business? Well, it’s always easier to break this down into possible advantages and disadvantages, and every business will be unique and require a different strategy. Some business owners may be fine with the consequences of venture capital investment, whereas some may find the changes quite restrictive and hindering.

Advantages of Venture Capitalists:

  • Investment – First and foremost (and most obvious), a VC fund will certainly provide you with the capital that you need to expand your business and reach your full potential.
  • Connections – Venture Capitalists are professionals and are most likely well connected in the business world. As they say with most things in life, it’s not what you know but who you know. If people who have a large stake in your company are well connected to influential and industrious businesspeople, this could have tremendous benefits for you and your company!
  • Expertise – It goes without saying that when you obtain the financial backing from venture capitalists, you’ll also obtain their expertise and wisdom. Their advice can prove invaluable to a startup or for young entrepreneurs who are just starting out in business, allowing you to benefit from their judgement so you don’t fall into some avoidable mistakes and pitfalls that may have otherwise resulted in losses!
  • Other Beneficial Resources – As a VC has an equity stake in your company, they will also care about what happens to your company. Should you fall on hard times involving tax or legal matters, they will be on hand to provide active and practical support to you.

Disadvantages of Venture Capitalists:

  • You lose control – Although a huge capital influx and abundance of professional support is always helpful, some other aspects of venture capitalism may not be. Venture capitalism is a business and sometimes quite fast paced and brutal, and you may find your new partners extremely keen to be involved in your business decisions and quite hard to say no to. Before you know it, you may lose control of the direction your company is heading in.
  • Minority Ownership – Following on from this, if your VC firm has a majority stake in your company (over 50%), you would then lose management control and essentially give up not just control, but full ownership of your business.

Summary

If you need a large injection of capital and professional experience in your startup to reach your business goals, then the services of a VC may be just what you need. However, it’s not for everyone, and it’s easy to get confused about what decision to make. If you have any questions about this, please get in touch with us here at Cubed Consultancy.

We are a Hertfordshire based consultancy company headed by two chartered accountants, Mark and Richard. With years of financial experience between us, we work closely with all types of clients, whether they are individuals or businesses, in order to tailor to everyone’s unique financial needs and requirements. If you have any questions at all, don’t hesitate to get in touch with us today and book a free consultation call via our website!

Mark
Mark Munnelly
Mark is a Chartered Accountant with a career spanning 18 years with both top 10 firms and independent accountancy practices. His expertise covers all accounting disciplines and passion is partnering with clients to reach their business and financial goals, even under the most challenging conditions. He is Co-Founder of Cubed Consultancy. Today, Cubed have got 100's of clients from sole traders, charities and larger multi-site businesses. Feel free to click book a complimentary consultation session by click here or on the Consultation button above.
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