Funding a Business: The Venture Capital Myth
Did you know that 95% of business owners don’t consider venture capital as a viable funding option? Most small business owners never consider it, but there is a good reason why. According to Forbes, 99% of businesses shouldn’t be considering venture capital as a funding option. Venture capitalists are picky, and finding a company willing to take the risk on a business can be difficult. Because of this, venture capital is generally reserved for businesses that are developing a truly innovative product or service. The term, however, has become something of a buzzword. With an increased interest in venture capital, it’s important to dispel a couple of myths.
How much is the average venture capital amount?
On average, a venture capital firm will invest around $7 million in a company. The amount may differ depending on the type of business and funding needs will vary from one industry to another because all businesses are unique. Funding through a venture capital firm is not off the table if you need more or less money than average, but you’ll need to find a firm that specializes in the type of investment you need.
When should you investigate venture capital as a funding option?
Venture capital funding is an excellent option for business owners that are looking to scale quickly. Significant investments require business owners to utilize the money in a way that is not only efficient but effectively scales the business.
Venture capital can be used to develop the product, buy out other businesses, or to take a business national or international. If you have a comprehensive business plan, and a growth plan, this type of funding might work best for you.
When shouldn’t you use a venture capital firm?
If you are looking to run your startup forever, a venture capital firm is not the right funding avenue for you. While venture capital funding isn’t a loan, meaning the money isn’t paid back on a timetable, venture capitalists expect a return on their investment, and relatively quickly.
In most cases, startups that seek venture capital funding are preparing for an initial public offering (IPO) or an acquisition. This type of business plan ensures the firm will get a return on their investment and equity in the startup. If this isn’t your business plan, not only will it be difficult to get interest from a venture capitalist, but your plan won’t mesh with investor interest.
How many businesses are funded by venture capitalists each year?
Current statistics suggest that about 600,000 businesses are started each and every year. Of the new companies that are formed, only 300 of them will be funded by venture capital firms. On average, venture capitalists are more interested in businesses that are past the startup phase. The reasoning is simple; the company has proven it can stand on its own merit. Only about 3% of all venture capital funding goes to startups.
On average, venture capital firms look more favorably on businesses that have about four years of operation experience under their belt. At this point, the risk is diminished, and the business owner is likely working toward an acquisition or an IPO.
In short, venture capital is not the right choice for 99% of all businesses started in the United States. For the 1% of owners that have a viable chance of gaining the interest of firms, the road is a long one. With that being said, there are certain circumstances where venture capital funding is the best option. Whether your business qualifies is subjective. Speaking with a seasoned veteran in the space is the right way of taking your business’ temperature.
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