Arguably, the largest obstacle that lies in the path between a simple idea and a profitable business is cash. Every new business needs it, but depending on the state of the economy and the perceived strength of the idea, whether you'll obtain cash to move your idea off the drawing board is often a great unknown. One of the most venerated paths to securing startup funds is working through investors such as venture capitalist firms or angel investors.
Venture capitalist firms, put simply, are corporations that make calculated investments in the startup companies that show the best potential of turning a profit. Most firms of this nature focus on a specific industry, so finding one that suits your particular business plan shouldn't be difficult. However, funding may come with stipulations that you may or may not be willing to obligate yourself to. So be sure you're very clear on all the terms before accepting investment funds.
Similarly, Angel investors offer startup funds, but on a much smaller scale. They are often private individuals or small capital groups that invest smaller amounts of cash, but still more than your average small business loan. Furthermore, Angel investors are less regulated than venture capitalist firms.
Both types of investment groups encompass similar risks and rewards. Below are some pros and cons to consider before you decide whether to seek startup capital though such investors.
Cash Obviously. Venture capitalist dollars far surpass most of what you can acquire via debt capital or other financing venues. These companies have portfolios that range into the billions of dollars. An influx of high dollar figures into a fast growing corporation can mean the difference between success and failure.
It's not a loan Walking down to your local bank or credit union and taking out a small business loan may be more convenient and immediate, but it's likely that your neighborhood branch cannot loan you the amount of money you need to weather the storm should you fall on down times. Additionally, should your loans go into default, it s the start of a ticking time bomb to bankruptcy. Venture capitalist dollars have no repay schedule. Rather these monies are an investment that is repaid by the profits your company generates. This eliminates repayment of debt as a cost of doing business.
Control You may lose it, depending on how much cash you accept and how early on in the process you acquire the venture capital. On occasion, angel investors will invest cash in a concept before it's an actual company in exchange for a good deal of control over how the formed corporation is managed. Ask yourself before you accept an offer of $500,000 if it's worth 60% of your company. This equals the total loss of control.
Profit Share The very nature of taking money from outside sources means you will see a drastic cut in the percentage of the profits your company will keep for itself if it does succeed. Before taking investment dollars from an angel investor or VC firm, consider if your company will receive more or less money when all parties have been paid their share. It's not unheard of for a company to forgo high dollar investment, counting on smaller scale success to generate more income than they would actually receive after paying out their obligation to investors.
There are definitely pros and cons of working with venture capitalist firms and angel investors, and the bottom line can be summarized like this: You get the needed cash, but you run the risk of losing control of your company. Look over your business plan and carefully decide whether this option suits your business.
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