Is Venture Capital the right source of funding for your business?

Despite being one of the most difficult sources of business funding to secure, many SMEs see venture capitalism as an attractive funding option. There are hundreds of VCs in the UK with money to invest and a successful pitch could see your business provided with millions of pounds in financing, the counsel of highly successful business people, access to a huge network of established contacts and even the possibility of increased media exposure. However, despite the many advantages evident, the fact remains that the criteria set out by venture capitalist firms, and the commitments resulting from a successful funding round, are often very specific and not suited to a lot of small businesses.

There are a variety of factors that could influence the suitability of Venture Capital for your business:

Very high returns:       It is not uncommon for VCs to expect a return of 5 to 10 times their initial investment. The majority of small businesses cannot provide the potential for growth to generate such returns.

Short exit periods:       The desired exit period for a lot of VCs can be in the range of 3 to 5 years. If this is in line with your goals then no problem, but if you are considering long-term investment then venture capital may not be for you.

Large cash injection:   This is good for helping the small proportion of companies for whom a cash injection of £3-30 million will materially increase their growth rate and chances of success. If this is not the case for your business, is it worth the high level of dilution that such a large equity investment will incur?

Large proportion of control:   Often, a prerequisite for a VCs investment is a high level of control within the investee company and therefore a major influence in the decision making process. This requires a lower level of independence for an entrepreneur in areas such as the direction of the business, business strategy, management decisions etc.  If you want to be an individual and retain a large proportion of control in your company, VC funding is probably not a suitable option.

Time consuming process: Obtaining equity investment can be time-consuming, with deals typically taking 6 months or more to arrange. So if you require a quick cash injection into your business, VC may not be the best funding option for you.

It may be that venture capital is not a suitable funding option for your business. However, this should not be cause for concern as there are a wealth of other business funding sources available in the form of grants, loans, angel investors or crowd funding to name a few. 

This guest post was kindly provided by Business Funding

Author  Joe Corringan.