Having a great idea for a business is one thing. Getting the financial backing to grow, scale and make it a success is quite another.<\/p>\n
Most entrepreneurs approach funding in stages, starting by dipping into their own savings, going cap-in-hand to friends and family, taking advantage of government grants, crowdfunding and potentially seeking angel and venture capital.<\/p>\n
The best funding option depends on the business, its track record and growth plans. Some companies stay self-funded forever, while others need the capital injection and expertise from outsiders. Getting the right investment, in the right sums at the right time can often make the different between a startup\u2019s success or failure.<\/p>\n
Techvibes has put together a list of common investment options for startups, and pros and cons for each. It will cover the following:<\/p>\n
If you\u2019re at the stage of seeking venture capital (VC) for your startup, congratulations, you\u2019re making things happen. VCs are deep-pocketed investors who put their money in startups they believe have the potential to scale, quickly. Of course, there\u2019s no guarantee anyone will wind up getting rich from your business idea, but you\u2019re on the right track.<\/p>\n
VCs tend to make much larger investments than other forms of funding. Of course there are some pitfalls to watch out for. Below are the pros and cons of VC funding:<\/p>\n
Deep pockets:<\/strong> VCs have serious money to help grow your business. The average investment is usually between $500,000 and $5 million, according to Entrepreneurship.org<\/a>. That\u2019s the kind of money that can supercharge sales. What\u2019s more, it\u2019s your money. As this QuickBooks blog<\/a> notes, VCs are gambling on your business.<\/p>\n \u201cIf it succeeds, they win big; if it fails, they eat their losses.\u201d That\u2019s unlike a bank loan. \u201cIf you go under, you won\u2019t have investor debt hanging over your head.\u201d<\/p>\n Experience:<\/strong> VCs are usually experienced entrepreneurs and investors.<\/p>\n \u201cIt\u2019s \u2018smart money,\u2019 which means they are a member of your team, effectively,\u201d says Mike Woollatt, CEO of the Canadian Venture Capital & Private Equity Association (CVCA<\/a>). \u00a0You not only get advice from\u00a0people\u00a0who\u2019ve built and sold successful companies in the past, but also active mentorship around how to overcome challenges and setbacks. Remember: VCs\u00a0have a vested interest\u00a0in ensuring your startup succeeds.<\/p>\n Valuable connections:<\/strong>\u00a0With experience comes connections, says\u00a0Woollatt, especially in your particular industry. For example, a tech-focused VC will likely have a broad network in tech hubs such as Kitchener-Waterloo, Toronto, Vancouver or Silicon Valley. Those connections can turn into investors. Who knows, one of them may even be a buyer of the company down the road \u2014 if that\u2019s your end game.<\/p>\n You have to really hustle, then wait:\u00a0<\/strong>You thought starting a company and getting it up and running was a lot of work. That\u2019s nothing compared to finding the right VC partner.<\/p>\n \u201cAs the entrepreneur, you’ll have to prepare thorough business plans with financial projections, power point presentations and even seek third party counsel to make your proposal more compelling,\u201d notes Los Angeles-based GrowThink in\u00a0this blog<\/a>. \u00a0\u201cOnce you’ve created these deliverables, you’ll have to network and contact the right venture capitalist that invests in your sector.\u201d<\/p>\n It could also take time for them to decide if they want to invest in your startup. Entrepreneurship.org pegs it at six months to a year. Business owners who don\u2019t possess the patience of a saint may find that wait excruciatingly frustrating,\u201d they note.<\/a><\/p>\n The pressure is on:<\/strong> VCs have high expectations for your business and the money they\u2019ve invested in it. Unlike your parents who, if you\u2019re lucky, may offer a few thousands bucks to help grow your startup, VC funding isn\u2019t love money. It\u2019s all business.<\/p>\n Expected rates of return can be as high as 50 per cent annually, Entrepreneurship.org warns.<\/p>\n Loss of equity\/control:<\/strong>\u00a0In most cases, a VC investment includes equity in your company. That\u2019s not necessarily a bad thing, especially if those equity holders can help grow your business. Problems usually arise when there\u2019s a\u00a0disagreement between founders and\u00a0VCs on the future direction.<\/p>\n If it gets really nasty, and depending how much equity you\u2019ve given up, you may wind up losing control of your own company.<\/p>\n Takeaway: <\/strong><\/p>\n VC funding is a blessing for many startups \u2014 and a sign of success. If you\u2019re attracting VC money it means you\u2019ve got a product or service that has potential and could make you \u2014 and your investors \u2014 rich. But that dream could collapse if you don\u2019t find the right VC team that shares your vision. Don\u2019t just be interviewed by VCs, do your own interviewing.<\/p>\nCons<\/strong><\/h3>\n