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Print Posted on 02/20/2017 in Fintech

6 Things Technology Start-ups Must Know About Venture Capital Funding

6 Things Technology Start-ups Must Know About Venture Capital Funding

Venture Capital refers to capital that investors pump into start-up businesses that have a high potential for rapid growth. It is an essential source of capital for start-ups that have no access to capital markets. There are a number of things that may be considered as advantageous and others disadvantageous to a start-up that opts for venture capital funding. 

Pros

Provides Additional Resources

Other than providing capital, venture capital firms provide other useful resources. In many instances, they provide active support in legal, tax advisory and personnel management. These are key areas in which a start-up may not have the requisite capacity. As a result, a start-up may experience a rapid growth. Indeed, venture capital firms are keen to fund only businesses that have the potential to grow rapidly.

Business Expert Services

As stated above, venture capital firms are keen to ensure that the start-ups that they fund become profitable as quickly as possible. To achieve this, they have specialists who provide key services to the start-ups. Some of the key areas where expert services are needed include financial management and human resource management. Any decision that a start-up makes in these areas has a significant bearing on the profitability or otherwise of the enterprise. For this reason, venture capital firms will intervene and offer expert advice.

Business Connections

 Since venture capital firms fund a variety of businesses, they are well connected. These connections are key to start-ups that require markets for their products as well as business partnerships. A venture capital firm will be very willing to provide these much needed connections because it is keen on the success of the start-up.

Cons

Loss of Control

A key requirement that a start-up must comply with to obtain venture capital funding is the ceding of substantial ownership to the venture capital firm. This may be as much as 60% of the ownership. In effect, this means that the venture capital firm will have the final say on the decisions of the start-up. Usually, they will add a member of their team to your company’s management team. Moreover, you will have to notify them of any major decision relating to the company and where they do not agree with it, you must abandon the same.

Risk of Losing your Intellectual Property Rights

Whereas venture capital firms generally treat your information confidentially, they usually do not sign non-disclosure agreements. This absence of a legal obligation on their part may not be good for the protection of your intellectual property rights. Your new ideas may be disclosed to a competitor before you have formally sought legal protection. Even where nobody patents your idea, you may lose your competitive advantage if such ideas were to be copied by your competitors.

No Long-Term Funding

Venture capital firms usually want to close the deal and get their investment back within a short time, usually three to five years. As a result, they may not provide an ideal source of capital for your long term investment.

Conclusion

As illustrated above, venture capital funding may or may not be ideal to you depending on your preferences and circumstances. With this information, you can evaluate the pros and cons and decide accordingly. See latest developments between Venture capital and Crowdfunding.



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