My sincere apologies for not publishing anything last week as I got overwhelmed with my own job, and in fact my own business.
Yes – yes, I don’t live off this blog. In fact, I am not getting a penny off it and only incurred costs to pay for the domain to make it look pretty for users! (I do it because I genuinely love it and want to share my knowledge with the wider audience)
Funding (part 7) is all about Venture Capital Financing (or VC Financing).
Not simple, not straightforward and not easy. I will try to be brief and capture the key points but Venture Capital Financing is no joke and takes the place in top-three formal investment practices. Clearly, we are the “business and psychology blog” and are going to study this type of investment from the perspective of a “receiving party” and not a ‘giver’.
As a rule, the venture capital is provided as a form of financing to young companies with a promising future. If your company has been identified by the funders as the one with a good potential for growth you might face with an immediate influx of money.
It is nice indeed when you, all of a sudden, get a direct injection of the desired amount (or sometimes more than have been projected for). But do bear in mind that you are about to start your ‘do’ off somebody’s fortune. With any investment comes the responsibility. Angel Investors and Venture Capitalists are gamblers. They are gambling with their fate where “risk big – win big” is the main game factor. If your company succeed in its aim then they win big being almost passive if it does not – they face the consequences of your failure, which at times will mean total loss of their investment. Subject to the provisions in the national law, some VC might never be able to recover their invested sum from the “receiver”. For instance, in the UK there is a process of safeguarding investors through charges on the property or assets and in some cases, the debt becomes a personal liability, however, there is always a chance for the money to be thrown into a bottomless pit.
The degree of VC (Venture Capitalist) involvement in your business varies. All depends on the amount sought, the nature of the business and the country of the deal. The bigger you are the more likely that you will not be setting contractual terms with individuals, but the VC firm will be involved. Most of the time these are middle-men with legal knowledge who act on behalf of the funder (sometimes those companies are fully owned by those funders) and they are then held responsible for management of the process and any future “chasing-up work”.
Let’s see what are the advantages of being financed through Venture Capital infusion
Pros / Advantages
- “Pool of Cash” The money received is yours to keep and yours to allocated where you think it needed the most. You are opening doors to the “pool of cash“. The capital which is needed to fund and grow the operation capability of your business and its existence.
- Advice & Guidance. The submission of the business plan will be a “must” and due to the high level of risk involved your ideas, suggestions and visions will get thoroughly scrutinised, talked through, amended and shaped. You might end up working with professionals and experts from the field who you would not be able to access/afford before and might need to change your plan to meet their requirements and expectations. Be prepared to be flexible.
- “Two steps at the time.” You can achieve your set aims quicker with cash available to you on request! You have the ‘thought generating machine’ and now it is being ‘oiled’ with capability. For an early-stage growth, it might become an enormous boost. Depending on the nature of your work, it might become apparent that the quicker you become operational the better it is for your growth potential as you might be a seasonal business or the competition is dire and you have to outperform those ‘others’ with your unique approach. Everything costs money to do – and there you have it!
Cons / Disadvantages
- “Sharing is caring”. The VC investor will most probably own a share in your business. You might also end up with a liability on your annual profits. Be careful when you are setting up terms. You might end up losing the significant level of control over your own business.
- “Gold fever”. (haha sorry, I just loved how I came up with this fancy name…mmm, you don’t look impressed)…anyway, due to the unrestricted access to cash infusion, your business may come off the rails. In fact, it might be due to your own fault. Maintaining strict discipline on costs is important during any stage of business lifespan, especially at the early stage of growth, having open access to the “river of cash” might carry your business out of its ‘sanity frame’ unless appropriate control measures will not be in place. The Gold Fever might start when you will see the slack in performance and will start plugging the gaps with additional funds instead of reviewing your strategy or changing trading approach.
- “Too small to be too big”. Your business might simply not be able to manage growth. You might not be ready. You might not have enough staff, office space, admin capability to manage growth efficiently. Your sales might spike but your existing contracts might not be resilient enough to keep up with growing demand for delivery. Great potential prognosis is not factual with the forecasted growth plunging into eternity. It is sometimes better to be real about who you are and what you can do at any point in time to avoid a reputational crash.