The pros and cons of venture capital investment

Kate Jones
@kateljnes

Australian entrepreneurs enjoy a busy venture capital scene. This month has been no exception with several large investments thrown at startups including fast-growing medical software company HotDoc receiving $2.2 million in funding from AirTree Ventures.

Venture capital investment spells success for some entrepreneurs and disaster for others. On the upside, more funding equals more staff and faster growth. But on the downside, it could mean giving up a stake in ownership.

Weighing up whether or not to accept an offer of venture capital comes down to the classic rich or king conundrum, says Dianne Taylor, Chair of Melbourne’s Eastern Innovation Business Centre.

“At this point, right now, do you want to have money, or do you want to have control?” she asks.

"Entrepreneurs need to choose between retaining full control and bringing in the funds and expertise to take their business to the next level.

“Sometimes it’s better to have a smaller share of a bigger pie, but the vision and values of the entrepreneur and VC partner need to be aligned for it to work.”

Entrepreneurs need to choose between retaining full control and bringing in the funds and expertise to take their business to the next level.

The pros

Seed funding from venture capitalists helps startups realise goals faster than self-funding does and puts entrepreneurs in touch with experienced business brains.

Point of sale software startup Kounta received venture capital funding last year, 12 months after it launched. Founder Nick Cloete says it was crucial to early stage development.

“Without it we wouldn’t have raised the funds needed to support our growth,” he says.

“We probably skipped three to five years in early development.”

Seed funding from venture capitalists helps startups realise goals faster than self-funding does and puts entrepreneurs in touch with experienced business brains.

The cons

But venture capital isn’t for every startup. There are the obvious risks of growing too fast without the right structures and strategies, and a dilution of original owners’ equity.

There may also be a clash of management approaches. While some venture capitalists micro-manage, others offer little support.

“We just didn’t really get a lot of guidance,” says chief executive of fintech firm Sharesight Doug Morris.

“You’re getting money from people with a lot of experience, so it would make sense to share some of that experience.”

Morris advises entrepreneurs do their homework on venture capital firms before accepting investment by speaking to others who have received funding.

“Find out if they are hands-on or hands-off so you know what happens after they give you a whole bunch of cash,” he says.

Kate Jones

Kate Jones writes for the business and money sections of The Age and Sydney Morning Herald. She also writes for The New Daily, TAC, RMIT and is a news writing tutor at Monash University.

Image: James LeeFlickr Creative Commons license

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