Every startup business is likely to experience capital formation issues, which often cause young businesses to suffer delays and competitive disadvantages that can stifle growth or keep a company from ever really getting off of the ground. Venture capital funding is a fantastic source of necessary startup capital. When working with the right investors, startups can have amazing access to high-level advice and talent along with the cash they need to operate and grow. As is the case with most benefits, however, there can be costs. In this article, tech investment expert Hiruy Amanuel discusses some of the potential pitfalls involved in accepting venture capital investments that are not always obvious.
Venture Capital Firms Seek to Minimize Costs and Maximize Return
Venture capital funds have their own investors to answer to in terms of performance and costs. Most investment agreements include multiple fees for management, accounting, auditing, and legal expenses. These fees can eat significantly into the total funding available for your startup.
Additionally, most venture capital funds expect returns of three times or more of their initial investment in order to provide the returns on investment their own investors expect. It is always absolutely critical that a startup receive independent advice about the terms and conditions regarding fees, expenses, and income sharing from competent financial and legal advisors.
Venture Capital Funding Can Compromise Your Growth and Sustainability Plans
Investors generally have a significant need to see growth in a way that can be very inconsistent with your original business plan. Selling equity in your company necessarily means that you have surrendered some measure of control over your company’s growth.
Investors have an expiration date on the investment they have made in your company, and the
growth needed to get to their expected returns are often unsustainable for the company in the long term. Your entrepreneurial goals for building a company that will be strong, stable, and productive throughout your life and something that you can use to provide for yourself and your family can be completely at odds with investors’ goals of boosting business valuation to seemingly impossible levels before a new round of funding comes along.
If you find yourself overly pressured to reach unrealistic growth levels, you can find that everything depends on the next round of financing going well. If it doesn’t you can find your company is in real trouble without additional funding. Your company may be forced to make drastic changes in its mission and operations to even extend the expiration date on funding.
Venture Capital Funding Can Be Incredibly Expensive
Giving up equity to fund your startup costs you at least some control over the outcome of your business objectives. It also is normally very expensive in terms of the final bottom-line cost of financing, and especially so if you are able to make your company successful and sustainable.
The cost of some extra time to develop slow and steady growth initially can save millions in the long run. Again, this is an area where competent and independent financial advice can make a huge difference in the outcome of your life’s business dream.
About Hiruy Amanuel
Hiruy Amanuel is an innovative technology investor who works to develop technological advances in Ethiopia and across the African continent. He has spent his professional life in pursuit of enabling entrepreneurs in Africa to make strides in the IT world. Mr. Amanuel is the co-founder of Gebeya, Inc., an online marketplace that trains Africa’s IT professionals and matches them with participants in the global business market.