We’ve talked a lot the last few weeks about your business plan and scaling your business. If you remember back to business planning, we mentioned that there are different purposes for each type of business plan. One of those purposes was to acquire some funding from venture capitalists.
Let’s breakdown what a venture capitalist does and how it could help your start up. According to Investopedia, “a venture capitalist is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to equities markets. Venture capitalists are willing to invest in such companies because they can earn a massive return on their investments if these companies are a success.”
Basically, if your business is able to potentially make a venture capitalist a lot of money, venture capital can be a great option.
However, a venture capitalist typically will take a large equity position in your business to ensure they have the return they desire. The question you need to ask yourself is whether giving away some of your ownership is actually more profitable in your checking account with a venture capitalist on your side, or if it makes more sense to retain full control and not have that venture capitalist.
Venture capitalists typically do not get involved in your business until you’re somewhat profitable. This is not like the HBO show Silicon Valley where your business is in complete startup mode with nothing to show for it in the checking account. Your business needs to be producing some type of revenue before a VC will actively get involved. A startup is a business typically only in existence for about three years. I would hope your business is generating some type of revenue after 3 years. If not, it’s a hobby and that’s a talk for a different time. There are plenty of loans for genuine start-up companies, aka pre-revenue, in addition to Angel Investors.
Before you pitch to a venture capitalist and give up equity in your business, seek other solutions for your small business. Call us crazy, but we’re firm believers in having small business owners remain majority shareholders. This is your vision after all, make sure you’re able to do things your way.