Three Disadvantages Associated with Venture Capital
We previously looked at some of the biggest advantages associated with venture capital. They make it very attractive. If you consider the fact that you can access unique untapped investment sources, have more flexible debt obligations, and can get help in many forms, it seems to be almost too good to be true. These advantages are true, and almost universal among venture capital deals. There are still some disadvantages, however. Everything comes at a cost, of course. In many cases, these costs are worthwhile. You need to be aware of them, however. The aim is not to put you off. Quite the contrary, in fact, I seek to help you be more aware of the dangers so that you can go in more ready than you otherwise would be.
Difficulty is Securing Funding
Granted, you will be able to access untapped funding opportunities. The flip side, however, is that obtaining it will not be easy. It can be a long and hard process. Two factors contribute to this difficulty. They are the accounting and legal costs that somebody must pay. Because each deal is unique, and the future is hard to predict, this can be a long process.
Loss of Ownership
Typically, unlike a loan, venture capital financing usually involves the loss of some ownership on the part of the entrepreneur. This means that a certain autonomy will be lost. Of course, in exchange, you are getting access to new contacts, and much expertise and knowledge. This comes at the cost of having to take into account the goals and ambitions of other people when make strategic decisions. Some freedom will be lost. There will be restrictions in terms of salaries, management composition, among others.
This is not always a bad thing. In actuality, it can be quite good as you will become more aware of your own company’s operations. The venture capitalist will scrutinize all of the business operations. This may increase accounting and auditing costs, and could slow down the process of making certain decisions. This further reflection could in fact help as you make more informed, and therefore more intelligent decisions.