Venture capital is a type of equity financing for businesses and entrepreneurs. It involves investors taking the risk of financing an idea or business in exchange for an ownership stake in the undertaking. Venture capital has good and bad sides.
The most interesting aspect of venture capital is that it provides a viable option for funding entrepreneurs and businesses, especially innovators who need investors to back their ideas.
Another advantage is business advice. VCs are savvy investors who take risks and expect rewards. Entrepreneurs benefit from their vast experience and knowledge in finance, investment, and business, which can increase the success of the business.
Importantly, venture capitalists give credibility to a business and foster improved business governance. VCs usually insist on best practices in organisational management and governance. This reduces the likelihood of mismanagement and fraud in the business.
As stated earlier, venture capital also has its ugly side. First, venture capitalists bankroll a business and become outspoken decision-makers and co-owners. Some entrepreneurs are forced to buy them out to avoid disagreements on company strategy and values.
Some VCs are impatient investors. Some of them expect immediate returns. Such investors are likely to harm the company’s long-term reputation and success.
Entrepreneurs and small businesses should expand their knowledge, manage their expectations and carefully determine whether they need VCs to back them.