Problems in Venture Capital Financing
What is Venture Capital Financing?
Venture capital is an essential part of any startup plan or business. In simple terms, venture capital financing is an investment in small startups with huge potentials. The venture capitalist will bear the necessary startup costs and expansion costs. Although it is quite efficient, in some cases, this technique has turned out to be quite troublesome and can lead to various problems.
Unwanted changes in management: When a venture capitalist finances an individual company, often they appoint an additional person in the control of the business. As a businessman, you might want to avoid external interference in your startup. But most of the investors include such clauses before funding the company.
Unbalanced equity stake: Providing the capital for a new startup costs a large amount of money. There is always an issue of losing all the money so, to minimize the drops, the investors demand a large chunk of equity stake from the businessmen. If you are a small startup owner, you won’t be too happy if someone else had the majority of the equity stakes in your company.
Inability to make decisions: It is quite evident that if you are approaching a venture capitalist to provide funding for your business, the investor would like to be involved in the decision making of the process. Ultimately, it leads to the owners for consulting about every decision regarding the company with the investors. Sometimes, this inability to make decisions on your own might lead to the downfall of the startup.
Funding delays: Investing in a business involves vast amounts of capital exchange. Sometimes, the venture capitalist asks the owners to fulfill particular conditions to get their funding request approved. If the constraints are not met, it will lead to a delay in approval for the funding requests. Also, there is a probability that even after completing all the objectives given by the investors, they may be unable to deliver you funds on time. There can be several reasons for that problem, but at the end, it might risk the owners of running out of business.
Venture Capitalist acts as another partner: As mentioned above, the investor of your business will most probably have a say in most import decisions of your startup. That means you have to accept the fact that you have an unofficial partner in your business. If you don’t want to get involved in this kind of situation, the only way is not to take any funding from the venture capitalists.
These were some of the most common problems faced by owners of startups and businesses who opt for funding by venture capitalists.