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Raising Venture Capital: The Pros and Cons

The major decision to make when raising capital for your business is whether to use debt or equity financing. Venture capital falls under the category of equity financing, which is very different from debt capital, which is commonly seen in the form of a loan from lending institutions like banks.

The key negative in trying to raise equity capital is that one has to first qualify. Venture capitalists seek fast growing companies that promise high chances of being acquired or going public within a few years. Typically, you, the entrepreneur, will have to show that your firm is in a fast-growing industry and that you're more than able to compete in such an environment.

Raising venture capital also requires a lot of work on your part. As the entrepreneur, you'll have to prepare thorough business plans with financial projections, power point presentations and even seek third party counsel to make your proposal more compelling. Once you've created these deliverables, you'll have to network and contact the right venture capitalist that invests in your sector.

In addition, raising equity capital, in principle, means that you're selling a portion of your company. Thus, you're giving up ownership in return for funding. Ultimately this means that if your company does get acquired, you will have to share the proceeds accordingly with the venture capitalist.

This may seem scary at first - but relax...

In our experience, a small piece of a big company is better than a large piece of a small company. For example, a 10% piece of a $10 million company is twice as valuable as 100% piece of a $500,000 company.

Remember that venture capital firms tend to focus on a particular industry. With their stake in your company, you have access to all of the venture capital firm's information and guidance. In fact, most venture capitalists will at least require being on your Board of Directors. These investors have the same goals as you, to grow a successful business and exit. Therefore their partial ownership in your company does not harm you.

Furthermore, venture capitalists have a lot of capital that they can invest. If your firm promises to grow, they can offer significant dollars to help expand your business even further. In addition, venture capitalists may have the tools and network in place to help spark this growth in the first place.

Finally, raising venture capital allows you to focus on growing your business without having to worry about short term payables. With venture capital, you do not have any interest or principal payments to make, which debt capital requires. For early stage companies that are pre-revenue and growth focused, this can make all the difference.