Cons of Venture Capital
Securing venture capital typically means that you have to give up something in exchange for the funding. Most venture capital firms are not interested in merely receiving the capital that they have invested along with a standard interest rate. In fact, there are some things that venture capital firms may ask for that may surprise you. These include:
Management Position - In many cases, a venture capital firm will want to add a member of their team to the start up company's management team. This is generally to ensure that the company can be successful, though this can also create internal problems.
Equity Position - Most venture capital firms require that the company give up an equity position to them in return for their funding. This amount is not small, in many cases it can be as much as 60 percent of the equity in the company. In effect, this means that the entrepreneur is not controlling their business; it is being controlled by the venture capital firm.
Decision Making - One of the biggest problems that many entrepreneurs face when they agree to accept venture capital is they often are giving up many key decisions in how their company will operate. Venture capital firms that have taken an equity position want a "seat at the table" when any major decision is made and they often have the power to override decisions.
Business Plans - When a business plan is written and submitted for financing considerations, most finance companies will agree to sign a non-disclosure agreement. This is not the case in most venture capital firms. Venture capital firms will nearly always refuse to sign a non-disclosure agreement due to the legal ramifications of doing so. This can put ideas from an entrepreneur at risk.
Funding Plan - If an entrepreneur writes their business plan and determines they need $500,000 to get the business launched, they may be lulled into thinking that these funds will come up front. This is simply not the case. Venture capital firms almost always set goals and milestones for releasing funds. Funding from venture capital firms is typically done in stages with an eye on the expansion of the business.
These are only a few of the possible problems an entrepreneur could face when they secure venture capital funding. It is important that they carefully review all agreements and have them reviewed by an attorney as well.