Why You Shouldn’t Take Venture Capital Money When You Don’t Need It
Not enough money when needed – but aplenty available when you are not seeking…that is the way the venture capital market works!
It is ironic really – investors are not all too keen on investing in your business in the initial stages when you actually need money to get established and grow. But once you take off and have proven yourself as a successful business venture, they are ready to battle with other investors to give you venture capital money for your business, money that you may not necessarily be in need of at that particular point in time.
Venture capitalists like to cover their risks and therefore, they feel safer investing in your business when it is running along nicely. They may not have given you money for product development but if the new product you have launched has taken over the market and is getting a good response, venture capitalists would like to have a part in your success by giving you money for further investment. However, the question you need to ask yourself is “do you need VC money or not?”
In this article, you will learn about 1) the advantages of taking venture capital money, 2) the 9 reasons why you shouldn’t take VC money when you don’t need it, and 3) how to politely decline an investment offer from an investor.
ADVANTAGES OF TAKING VENTURE CAPITAL MONEY
Out of all the different funding options available to you, venture capital is a safe choice. There are a number of benefits associated with venture capital money. To begin with, it fuels your business. You may have a great idea but no money to translate the idea into a viable business. Venture capitalists give you the money to move ahead and materialize your business idea.
If you are already in business, you can use the venture capital for growth and development. You can expand your product line or grow your reach by expanding your target market and entering new markets.
Your existing revenue may be getting consumed in maintaining your business operations; venture capital provides you spare funds for enhancements. Venture capital can help you improve your business processes and give you funds for automation and technological development.
One of the most enticing features of venture capital is that since it is equity and not a loan, you will not have to worry about repaying it. With venture capital, you get access to money for doing business without having to fulfill loan application formalities and without having to worry about following a repayment schedule. You are spared from paying off exorbitant interest rates and meeting the terms and conditions of a loan.
Venture capitalists get to participate in your business operations and contribute towards decision-making. They are experts at analyzing business opportunities and therefore can give you useful insight that can be beneficial for your business’s future. Quite a lot of them are good business managers as well. So you get to have an extra pair of hands to help you manage your business operations.
Venture capitalists have a vested interest in your business’s success and therefore they can give you access to their contacts. This will give you a chance to enhance your business network and get connected with professionals who can share their experiences and give you valuable business advice. Venture capitalists can also get you in touch with specialists and consultants whose expertise can be fruitful for you. For example, an HR consultant can help you with hiring competent staff for your business.
Interested in a quick introduction to what Venture Capital is all about? Read this slides.
REASONS WHY YOU SHOULDN’T TAKE MONEY WHEN YOU DON’T NEED IT
Who doesn’t want money? When the money is there – you should take it, right? Sounds awkward that you should say no to an investor? But should you always welcome investment even if you don’t need it?
With venture capital, you should proceed with caution. Just as everything else does, venture capital also has a downside to it; which is why there are sound reasons why you shouldn’t take money when you don’t necessarily need it.
#1: Investors Become Partners
Venture capital money is equity; thus, venture capital allows investors to become partners in your business. You are literally giving a part of your business to the investor in return for their money. This means they get a share in your business decisions and most importantly, in your business’s success.
So if you are making profit, you won’t get to keep the entire profit to yourself, you will have to share a percentage of it with your investors. This percentage will depend upon the percentage of equity share of the investor. The more investors or venture capitalists you have, the greater chunk of your profit will go to them.
You Lose your Freedom to Change
If you want to exit from a particular market or withdraw a particular product from your product line, you cannot just take the decision in isolation and implement it.
Since the investors are owners as well, for any bigger change you want to bring in your business, you would have to consult with the venture capitalists. You need to get their consent before implementing any changes. Therefore, you lose your freedom to change.
You Divide your Decision Making Authority & Make the Decision Making Process potentially Longer
When you were the sole owner of your business, you had the complete decision making authority with yourself. But now you would have to consult your venture capitalists while making decisions. This can sometimes elongate the decision making process. The more venture capitalists involved, the more time it may take to reach a unanimous decision.
Learn everything about going from your business idea to IPO and the startup funding process.
#2: The Venture Capitalists May Not Have the Expertise
Some investors are more involved and are willing to help you with your business; the rest aren’t as involved and not interested in interfering in your business operations. Then there are some who are unable to help you because they don’t have the expertise. They may be from a different field or background and therefore, not have much knowledge regarding the kind of market you are working in.
Such venture capitalists get to have a share in your business’s success without contributing anything towards it (apart from their money of course).
#3: The Venture Capitalists’ Expectations May be Too High
Since venture capitalists want to get the most out of their investments, their expectations may be too high, always keeping you under pressure.
They may expect decisions and changes to bring results too quickly and get dissatisfied with a change if it doesn’t bring results as per their expectations. They may expect new product development to happen in unrealistically short times or demand you to deliver the final product much sooner than your process allows you to. They may have unrealistic expectations concerning the number of hours you put-in in a day or your availability during holidays and weekends.
#4: Investors Gain a Say in How You Are Running your Business
When investors fund your business, they gain an influence over your business’s management. Some investors may not like to interfere in your day-to-day operations and short-term management decision; whereas others like to be involved in all the day-to-day matters of your business.
Your way of running the business may differ from theirs but the thought of losing venture capital may force you to compromise and run your business the way investors want you to.
#5: Investors Will Always Ask for Progress Reports
In order to safeguard your investments, you will have to continuously prove your worth. Investors like to keep tabs on their investments and anticipate profits; therefore, they will keep bothering you with inquiries about how things are going and what results your business is achieving. You will have to collect and present data and numbers so investors are aware about how your business is progressing. They will continuously demand progress reports from you on a regular basis so they know that their investment is safe and earning a high return.
#6: Investors may De-Track you (Due to Different Company Strategy Expectations)
You may want to focus on a new target market you have recently identified for yourself but the investors may keep you busy in preparing a presentation for the next investors’ meeting. You may want to improve customer services but the investors may want you to explore the option of revamping your business’s website.
What is important for you may not be as important to your investors; their priority list may differ from yours, de-tracking you from what you want to do. Other situations concerning investors may also become a source of distraction for you. Rather than working on your strategy, you may have to spend your time and effort in trying to contact the investors so they are available for meetings at the decided time.
#7: Self-Reliance is the Best Kind of Reliance
If you set-up, grow and run your business with your own money, you own the entire business. You are your own boss, answerable to no one but you. Being the sole proprietor makes you depend on yourself. No one can match the level of commitment and passion you have for your business and therefore, it is best to rely on yourself for financing the business as compared to availing any other option – including venture capital.
Things may not always run smoothly and when your business is faced with a tough time, the investors may not be very helpful (but they would still be expecting you to deliver results). Therefore, relying on self is the best kind of reliance.
#8: It May Become Difficult to Take all Investors On-Board
While making decisions, short-term and long-term, conflicts may arise between the different investors. They may put you in a difficult situation and it may become hard for you to resolve these conflicts peacefully. These conflicts can arise due to different reasons including varying backgrounds, experiences and expertise of the investors as well as differences in their interests (one may want to expand customer base while other may want to focus on improving retention rate of existing customers).
#9: Getting Venture Capital Money is Associated with High Legal Costs
Since high stakes are involved, a venture capital deal has to go through rigorous legal and accounting formalities. Both parties need to go over the terms and agreements of the deal over and over again.
For this, you would need to hire a legal expert or a professional accountant – who charge heftily for their services. So ultimately, the venture capital deal costs you a lot in terms of paying accounting and legal consultant fees.
HOW TO POLITELY SAY ‘NO’ TO AN INVESTOR
Even though you may not need the money at the particular point in time, you could need it at some point in time in the future. You don’t want to blatantly say no to investors and offend them because you might need to ask for investments later on. Here are a few ways of politely saying no to them right now but keeping doors open for future:
Ask them to Reschedule their Meeting
Make an excuse of being busy with some unavoidable commitment. This way you indirectly communicate to them that meeting with them isn’t a high priority for you since you aren’t looking for investors. So you aren’t actually saying ‘no’ while at the same time letting them know that they aren’t urgently needed by your business.
Explain your Priorities to Them
You can let them know that you are not looking to grow right now and that your strategy is to strengthen your existing customer base. You can tell them that you have not reached your economies of scale yet.
Ask them about their Other Investment Interests
Ask them about the other companies they are considering investing in, and subtly reflect that the other options are good options. Give them strong reasons as to why they should move ahead with another company, but don’t be too pushy. This can give them an idea that you aren’t interested in their investment proposal.
Communicate Openly & Honestly
Be honest with the investors and let them know that currently you are not looking for investment for your business. Your genuine attitude will enable them to take the offer rejection positively and also keep the doors of investment open for you.
Tell them you Need Time to Think/Analyze Their Offer
Listen to the investment offer and ask them to give you time for looking deeper into the terms and conditions of the agreement. This way you can buy some time and then politely say no rather than saying no to them upfront. This way the investors feel that at-least you gave a chance to their offer and that you spent time in considering it.
Set your Own Terms
Investors like to set-up investment terms that put them in an advantageous position; rather than saying no, put forward your own terms and conditions. Chances are that the investors will back-off from the offer themselves.
The business world is full of risks. Whether you accept a venture capitalist’s offer or reject it, think twice and then once more. You should have solid reasons for your decision and your focus should be on the long-term effects.
If you have worked out the long-term goals for yourself, you will have a clearer picture of the future of your business. If you feel that in future, your growth and expansion plans will require you to seek venture capital, then evaluating and accepting a few of the current offers may be the right decision for you.
If you do not foresee the need for money in the long-term even, then giving ownership of your business in return for investment money may not be a smart decision.
Support your decision to accept or reject investments with logically strong reasons; if you decide to move ahead with venture capital funding then try to get investors that share the same business interests/background as yours and those that bring more to the business than just money.