800.668.7020
M-F 8:00AM TO 5:30PM CST
Better coverage. Better price.
Don't Risk IT
Is VC Funding Right for Your Business?

Is VC Funding Right for Your Business?

Monday, May 16, 2016/Categories: business-tips

Venture capital can crank your startup into overdrive, but it isn’t a one-size-fits-all approach to fundraising.

What makes a startup a good candidate for VC investors? And what should you consider before you decide to take VC funding? We talked to a few experts to find out.

VCs like High-Risk, High-Reward Companies

Peter Hogan, an attorney at (@ClarkTrevithick), focuses his practice on representing companies in public offerings, acquisitions, and venture capital funding, so he’s seen the “full-range spectrum” of business financing.

“For VC, a lot depends on the business climate,” Hogan says.

Because VCs are primarily interested in high-risk, high-reward companies that can grow rapidly and take advantage of a large market, they tend to be picky about who they fund. So if you’re considering VC funding, think about the future of your startup. Where do you see it?

Investors want to see a clear exit strategy, Hogan says. An exit for your investors could include…

  • Being acquired by another company.
  • Having a public offering.
  • Having stock sold in a private sale transaction.

In short, they want you to reach a situation where they can cash out and get their return.

Look at Your Idea, Your Team, and Your Future

A nice product alone isn’t enough to attract investors, according to Dave Sorin (@sorin_dave), chair of the Venture Capital and Emerging Growth practice at law firm (@mccarterenglish). Now, he says, it’s imperative that your product be something the market has to have. “They’re looking for paradigm-shifting ideas.”

If you think your idea fits the bill, that’s only part of the equation. Sorin lays out additional attributes of a business that VCs will carefully consider:

  • Who you have on your team. “Investors love great management teams,” he says. They like to see co-founders as opposed to people going solo and want to know the past successes of the people you have leading the effort.
  • Market size. The market for your product or services has to be big to get the attention of most VCs. You have to be able to grow exponentially and with enough room to make it worth their while.
  • Barriers to entry. “This could be your reputation, intellectual property, licenses, brand – whatever makes it harder for other companies to compete,” Sorin says.

Though these aren’t hard or fast guidelines for getting investor funding, they tend to be especially important in the world of venture capital. If you believe your business idea meets these expectations, then VCs could be the solution to get your business off the ground.

Before you make any decisions, make sure you understand everything that comes along with taking investor funds.

Are You Willing to Give Away Ownership?

By trading equity for startup funds, you’ll have less ownership of the startup than if you find a way to fund yourself. And VCs tend to require a hefty stake in ownership because of the risk involved.

“As an entrepreneur, always ask yourself, ‘Do I really need to raise money right now?’” says Terence Channon (@terencechannon), managing director of (@saltminesgroup), a firm that helps early-stage companies get funding.

If you do need capital, Channon recommends looking at the spectrum available to you, such as traditional bank financing or convertible debt. “These can be ways to retain equity and still secure the capital to grow,” he says. “Sometimes, it makes more sense to bring on a talented team member as a partner and provide him with equity versus raising capital with the idea of hiring this position.”

Explore Every Option Available to You

Of course, venture capital may not even be available to you.

Some areas attract few investors, says Ariel Arrieta (@aarrieta), CEO and managing partner of accelerator program . “In those cases, finding investment from family and acquaintances or a possible partner from the industry is the best – and may be the only – available option.”

Still, this may be a good thing. “In my experience, at an early stage, it is always better that the entrepreneurial team uses their own resources for as long as possible,” Arrieta says.

If you succeed on your own, you may even find it easier to attract investors or even other businesses in later stages. It’s these lessons that may end up being the game-changer in your business and your entrepreneurial career.

For more startup advice, read “3 Startup Lessons from the University of Cincinnati’s Small Business Institute.”

The Small Business
Insurance Leader
800.688.1984 | 8 am - 5:30 pm CST | M-F
Customer Rating 4.9 out of 5
Read Customer Reviews

Categories

The Small Business Insurance Leader