Question

Some entrepreneurs say you shouldn’t raise venture capital unless you have no other alternative. Do you agree or disagree? Why?

Answer 1

Raising funds from a venture capital is a way of funding the business. Now, when we fund our business or operation by raising money from external sources, there are always a cost associated with it. Traditionally this has been the interest that we pay for our loans. This is what happens when you raise money through debt.

However, when you raise money from a venture capital, you do not need to pay them a regular interest. Instead, you give them a portion of the company through stocks. By doing so it may seem to be comparatively cheaper than other costs of capital, but it also dilutes your stock and power in the company. This results in the venture capitalists gaining some control in your company. By doing so they may begin to dictate the direction of the company in order to secure their investment. Now if that direction does not match with that of the founder then there will likely be conflicts.

This provides a pretty difficult proposition for the company and the organization may suffer due to this conflict. In addition to the conflict you also need to keep in mind that the venture capitalists usually have a stronger bargaining position in many instances when it comes to the fund. As a result, they may dictate the term sheet in their favor and as a founder you may find it difficult to negotiate a favorable deal.

Also the venture capitalists usually have their own interest and often invest in companies with ulterior motives. It is not very simple and straight forward. The VC market is quite unorganized and unregulated by the governments and thus there is high risk of fraud, deception and other malicious attempts. Considering all these point, a founder should only resort to VC as the last resort.