Is It Okay To Invest In Startups If You Are New To Venture Capital? You Need To Read This
Yes, it is okay to invest in startups, even if you are new to the world of venture capital.
Cash flow is a common and probably the biggest problem for a startup to stay afloat. Yes, business loans are there but sometimes, the financial picture of the organization is not promising enough to qualify you for a business loan.
In such scenarios, venture capital or VC can offer you the needed funding. Venture Capital is secure as the investors always look for long-term partnerships. So, they will always opt for financial terms that are profitable for the business.
In addition, you will need to sell a certain amount of equity to the VC investors. So, they will offer you insights and mentoring in your business operations. You can argue that it is like compromising absolute control over the business.
However, from VC investors, you will get an objective insight into the financial landscape of your business. Also, they will help you remain profitable in the long run.
Furthermore, the process from contacting a VC investor to sealing the financial deal takes around six to nine months. In many cases, it can prolong up to several years. So, before a VC firm seals the deal, it will get enough time to decide whether it will remain on board for funding or leave the scenario.
Invest In Startup: What Is Venture Capital?
Venture Capital, or VC is a popular funding method to invest in startups. In return for the fund, you will offer a certain percentage of equity to the investor. Usually, the equity offered to an investor is between 20 to 50%.
Along with funds, a venture capitalist will also offer mentorship, specialized talents, and other benefits to a startup. Specialized talents and mentorship can streamline the operations of a startup and these can help in the further expansion of the business.
Having said that, when you invest in startups as a venture capitalist (also called a capitalist), or you take venture capital funds for your startup, you become subject to certain risk factors.
The capitalist has the risk of losing their money if the startup fails. Similarly, as the owner of the startup, you will need to make repayments in the form of equity, and you will have to consider their opinions on the business operations.
When capitalists invest in startups, you can expect three types of funding, and they are pre-seed funding, seed funding, and early-stage funding.
| Type of Venture Capital | Suitable Stage to Invest In Startups |
| Pre-Seed Funding | At this stage, the business is yet to finalize its ideas. |
| Seed Funding | At this stage, the startup is ready to sell its products and services. |
| Early Stage Funding | This is suitable for the growing stage of the business. As the capitalist notices measurable growth in the business, they are willing to put in more funds for expansion. |
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Before asking a capitalist to invest in startups in 2024, you must note that 2023 has not been a promising year for venture capital. The VC Market achieved the lowest numbers in the last four years, recording a 35% year-over-year reduction from the already decreasing VC levels of 2022.
So, assess the risks well and consult a financial expert for better alternatives like bootstrapping, crowdfunding, business credit cards, business loans, etc.
Know The Pros Of Venture Capital Before You Invest In Startups 👍
Venture Capital is undoubtedly a secure funding method for startups. It also helps a startup business to grow its network. Let’s discuss the benefits of getting a venture capitalist to invest in startups.
1. Secure Funding
With Venture Capital, you don’t need to make monthly repayments of principal and interest like bank loans. The equity you give to the capitalist is your repayment for the fund you have received.
So, if your startup does well, you don’t have to worry about the repayment. Even if the startup is not profitable anymore, the capitalist can sell their shares and follow the exit strategy to get rid of the situation.
2. No Need For Funds And Assets
Getting a capitalist to invest in startups is the easiest at the early stage level. Your products or services are already out in the market. Further, at this stage, you have already managed to show certain growth.
Nevertheless, you will also find capitalists willing to invest in startups that are brand new (pre-seed funding). It does not matter in what stage of business you are. You can get a venture capitalist to invest in your business without funds or assets.
3. Getting Associated With Specialized Talents
As a startup owner, you may not have the talents or teams to streamline the business. However, a capitalist can use their networking to get connected to specialized talents. In a similar way, they can help in the expansion of your business.
Furthermore, with a certain percentage of equity, the capitalist will also offer you mentoring, which is like a lot of insight and the biggest eye-opener for a startup business.
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Overall, Venture Capital has broken the myth that large companies always have the advantage of better resources than startups.
Venture Capital has come a long way, and over time, it has become efficient enough to meet the funding needs of a startup and back it up with enough networking, mentoring, and talent.
So, when you have a capitalist to invest in startups, you just need to crack the operations and distributions.
Know The Cons Of Venture Capital Before You Invest In Startups 👎
Despite having many benefits, getting venture capitalists to invest in startups can be challenging. The primary challenge is to get access to Venture Capital funds, considering so many startups are up for it.
322,000 new businesses were formed in the USA in the fourth quarter of 2023. So, to get a capitalist to invest in startups, you need to have profitable and innovative business ideas.
Further, you need to have the preparations to operate in the long run. However, with Venture Capital, you also tend to lose your control and equity.
Giving Equity To The Stakeholder
Giving equity to the investor is a profitable form when it comes to repaying your investor. However, giving around 20-50% equity to them is also a disadvantage as you lose absolute control over the management and operations of your company.
Studies show that when a VC uses its exit strategy, they are likely to own half of its business. Also, when they sell their shares at the time of exit, for you, it becomes like beginning from scratch.
Having said that, it is still okay to have VCs invest in startups, as the 2024 National Venture Capital Association (NVCA) data says that by the end of 2023, the USA had 3,417 VC firms, and they managed to seal 13,608 deals worth of $170.6 billion.
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