Venture Capital: Pros, Cons, Alternatives

Venture CapitalThis post is inspired by different conversations I have had over the past couple of weeks; I wanted to discuss my personal opinion on getting Venture Capital (VC). In short I think getting a VC, at least in the initial stage of the business is, not only unnecessary but can even be counterproductive due to the loss of focus on developing the idea and overspending. My suggestion is to spend the first 6-12 months on generating even a small revenue and proving that your idea is viable. Learn how things work, what money is spent on, and what is needed to take your love creation to the next level.  It will be easier to receive VC after this period and you will actually know where the money will go.

Pros:

Cashflow: It is the bloodline of a start-up. Often having enough of it determines the business’s success. The appropriate amount of venture capital allows an entrepreneur to concentrate on the development of the idea and not worry about cashflow for a bit. It also allows a business to take bigger steps and develop product before they get copied by competitors with more funds.
Mentorship: Is another major benefit, VC’s have a vested interest in your business succeding, that is why you are often able to tap into their experience, brain, and frequently their rolodex.

Cons:


Loss of Control: I got into my own business, because I wanted the freedom of not reporting to anyone but myself. I dress, go to bed, wake up and take vacations when I want. I am able to do all of that because I don’t report to anyone. When you receive VC you automatically start reporting to your investors. Furthermore, you exchange part of your company for the investment which means that a VC can potentially sell this part to somebody else. Moreover, many times VCs see a return on their investment when company goes public. The danger here is that VC will push for IPO, before the company is ready and the company will receive a low valuation. VC will still get their return, but you won’t.

Loss of Focus: Getting VC is never an easy task and it is even harder these days due to the recession economy. Getting a VC is a time consuming process and the danger is that an entrepreneur will lose the focus from developing the idea to running around from one fund to another, or from one Angel investor to another. Some start-ups don’t even know yet what they need the money for and are already looking for some. This is especially true for someone on their first start-up and for those who lack formal experience. The first six months of a start-up is when the idea is still new and the entrepreneur has a lot of energy and motivation. If you can, spend this energy on getting your business off the ground and prove that your idea is viable. If you would like to get a VC after it will be much easier.

Overspending: When a business is bootstrapped the entrepreneur usually counts every penny, they get what they can for free, pay only for necessities and concentrate on cashflow. Sometimes when the entrepreneur receives investment – they relax.They start flying to every kind of event out there and spend more time talking about their business than actually working on it. The inevitable result is that once the company runs out of VC it is done. One of the signs of this is when the founding CEO jumps the ship.

High Cost in the Long Run: If your company does become successful and receives high valuation you might end up giving back to your VC 1000% of what they invested. If you are positive that your new start-up will succeed try getting a loan–the APR is better.

Alternatives

Savings: For G-ds sake dont quit your day job without savings for at least 3-6 months, plus enough for some initial business investment. Some people hope they are going to find  VC fast or get some sort of loan. This rarely happens fast, so better plan your exit from a regular job and save appropriately.

Government programs: I am only familiar with Canadian and Israeli programs, but I would assume that any developed country would have similar programs in place. Some of these programs are easy enough to be apply to yourself; with other programs, that are more complicated, you are better off using a third party company that works on contingency basis. This is a list of the most famous programs, there probably more programs that are specific to the industry. You must keep an eye on all the announcements from the government as they change programs and budgets often.
  • SR&ED credit: Research credit that is applicable to most of the tech startups. A corporation can receive up to 35% of first $2 million expenditures in Canada
  • OIDMTC: Ontario Interactive Digital Media Tax Credit up to 40% of eligible Ontario labour expenditures and eligible marketing and distribution expenses.
  • SBIP: Small Business Internship Program. Government of Canada reimburses 75 percent of intern salary up to a total of $10,000 per intern.
  • NRC-IRAP: Provides non-repayable contributions to Canadian SMEs interested in growing by using technology to commercialize services, products and processes in Canadian and international markets.
  • NRC-YES: Youth Employment Strategy. Internship Program with Innovative Small and Medium-sized Enterprises and Collaborative Research Internships Program provide firms with support to hire post-secondary graduates.  Up to $15,000 from 6-12 months.
Loans: There are some loans that are specifically targeted to new businesses. A word of caution: don’t borrow money unless you absolutely have to and NEVER and I mean NEVER use credit cards as the source of your finances.
  • CYBF: Loan up to $15,000 for two to four years with CIBC prime rate plus 2% in the first year and only CIBC prime rate plus 1% in consecutive years. Plus you receive a free mentor for 2 years.
  • BDC: In case you got approved for CYBF loan BDC can match it for up to another $15,000 amortised over 3 to 5 years matching the CYBF amortization period

One thought on “Venture Capital: Pros, Cons, Alternatives”

  1. I used government provided loans when first started my business. It is easy to pay and I started up small.,,,finger cross I could handle even if it flops.

    A recent documentary film inspired me quite a few entrepreneurial ideas -the film named ” The YES Movie ” at http://www.TheYESmovie.comproduced by Louis Lautman.

    Bonus -Some famous authors interviews

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