In business, there are many different ways to get money. There’s bank loans, subsides, and investments. One type of investment that’s becoming particularly popular is venture capital, where wealthy individuals and companies put in large sums of money into young businesses, often times in the technology industry, in exchange for equity from that company. This is commonly done, but there are many different types of deals. Those who invest money want something in return. How much of your business should you trade for venture capital?
First, it’s important to understand how venture capital works and the different types out there. Typically, venture capitalists are private entities. Either wealthy people, or companies, that have a lot of money to invest in risky businesses. They focus on startups that couldn’t get bank loans or other types of investments, because they are too young and don’t have any track record yet. Also, this happens mostly in sectors with a lot of innovation, like technology. The idea is that by investing, there’s no guarantee that the company will succeed, but if it does, then the payoff will be big. So it’s normal that venture capitalists want to get a large share of the action. This is where the different types are important to understand. First, there’s angel investors, which is a type of venture capitalists who typically have a lot of money, and a lot of contacts. They know people who do good stuff and start good companies. As such, they will invest some of their money into these businesses without asking for much in return. These types of people are typically looking for more of a “hands-off” type of investment.
At a minimum, this kind of investment, whether it’s $25,000 or a million, will require a business owner to give up some equity, which means some stock options or becoming only part owner of the company. But angel investors stop there, and don’t require too much active control. Most venture capitalists however require far more than that. In fact, they often become board members, and want to affect the day to day operations. After all, if the business runs mostly on their money, it’s normal for them to want to protect their investment. But it’s not all bad either. Venture capitalists rarely provide just money. These are typically very experienced business people, and they can provide advice, contacts, and help you get the right people for the job, on your board, and so on.
Overall, venture capital is never free money. In fact, if you sign a restrictive deal, that gives away part of the control you have, then you’ll have to live with the consequences. There’s been plenty of cases where a founder gives away more and more of the company in order to grow, then one day the board of director isn’t satisfied with how the company is run anymore, and the founder is fired. That’s why it’s always very important to not only see the short terms, but also long term effects.
