Pros and Cons of Venture Capital Funding

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"A lot of companies say they can provide venture capital funding or its equivalent to new dot-com start-ups, or even for new ideas. What are the pros and cons of this? -- Albert Ong, Malaysia

The advantage of venture capital investment is that you get money that enables you to expand your business and obtain market share before someone beats you to it. Venture capital is not a loan that needs to be repaid; rather, venture capitalists (VCs) invest their money in exchange for equity (an ownership share) in your company. VCs get their cash out only when your business is acquired by another company or "goes public," that is, when its shares can be publicly traded on a stock exchange. The disadvantage is that you are no longer the sole owner of your company and may lose control. Moreover, a VC may move your company towards an Initial Public Offering (IPO) of publicly traded shares faster than might be best for the long-term health of the business.

Joanne Gucwa, president of Technology Management Associates http://techmanage.com of Chicago, says the earlier the stage where you receive funding, the more you have to give up. A few VC companies or "angel investors" might invest in what is not yet a real operating business but just a concept. For $350,000, they might take a 60% ownership in the company, and put in their own management team. If they decide that this can become a viable business ("proof of concept"), they might fund the company for another $5 million, taking yet more equity. By the second round of financing, the original business owner might retain only a 5% to 10% ownership.

In order to hang onto as much of your company as possible, "bootstrap," that is, raise funds from your own assets, and from family and friends. Warning: don't raise money with credit cards; the interest is exorbitant and will quickly destroy you and your business. The best time to seek outside investment is after you have already developed a viable business that now needs capital to grow marketshare or build inventory. Most traditional VCs won't touch a company that hasn't been around for at least two years.