Should I seek venture capital?
FSB expert Patrick Thean weighs pros and cons of the VC route.
(FSB Online) -- Dear FSB: I am considering a few business concepts but don't know if I should try to finance them on my own or try to make it big by seeking the assistance of a venture capitalist. What are the pros and cons of working with VCs?
- Ashish Singh, Mumbai, India
Dear Ashish: Starting a company on your own and working with VCs aren't mutually exclusive arrangements. VCs like to invest in ideas that can be easily proved and have business models that can scale quickly, beyond the personality and strength of the founder.
The main decision an entrepreneur has to make regarding a VC is the tradeoff between risk and reward. Working with a VC usually means the investor will expect you to push hard for fast growth. If your concepts convert to quick sales, you will have the opportunity to build a stronger company faster. However, if you do not achieve your plan, you may see your ownership get diluted. The VC will have to invest further to keep operations running, which means you will have to give up more equity.
If you do decide to seek venture capital, you may want to wait until you have one or two major customers. That will make your business plan more appealing. Running your company on sales is like operating a car with a tank full of gasoline. Relying on VC funds is like driving on fumes. Ultimately you will run out of fumes, and you had better find a steady source of fuel.