Venture Capital firms are one way to raise a serious amount of capital but as you may imagine there are pitfalls. The main one being loss of equity far beyond the 51% mark. Further the final vote on ‘the right of sale’ will also most probably be a mandatory right for them. Since Venture Capitalists main motivation is ‘ROISAP’ (return on investment soon as possible) Venture Capitalists will always have a frantic desire to flip every deal as quickly as possible. And they will not care where that return comes from, yourself or an outside party as long as they receive a massive bonus for the risk and skill for what they have invested.

More appealing to an entrepreneur starting-up is to seek a business angel investor interested in the line of work you are involved in, as they will either take an equity position and some level of debt (or typically a combination of the two) in exchange for their investment. They will also take a seat on your board of directors, which they will use as a platform to monitor their investment and to provide invaluable advice. Sometimes they can actually take an active role in the organisation and get it kick started into high gear. This freedom can afford an organisation the ability to swiftly hire key employees and develop its business model to the point where it is ready to seek larger scale, second-round financing at a much more reasonable cost-to-equity, due to the proven track record within the organisation.

Other benefits to the entrepreneur include access to the expertise and business networks that the angel investors may be involved with. In addition to this, the growing trend of angel investor syndicating means that an individual entrepreneur can raise significant capital (significantly above the £500K mark) in a single financing deal without the need to negotiate separately with each investor.

Health Warning:

Venture capital money is not for the faint-hearted. Too often, it is only for the desperate - unless your desire is to build a business with an exit strategy in mind from day 1. There is nothing wrong with such a goal in the short term, as the returns can be staggering, but expect to make them many - many more millions then your side – that is if you get that far. A great many other original creators have been squeezed out long before the 'D-day - big pay day'.

Angel investment therefore represents an invaluable source of alternative funding. And one that is far more attractive and realistic for a start-up entrepreneur. Benefits for both the Entrepreneur and the Angel can be great provided of course that the expectations are well drafted and thought out from day one and the funding agreement is structured to meet the demands of both sides.

The main difference between a business angel and a venture capitalist is that venture capital funding will come with legal agreements that will be inevitably always Venture capitalist biased with terms that almost seem utterly unfair and unjust, whereas, Angel investment will be far more flexible. It’s not uncommon for some Angels to even shy away from using corporate solicitors when drafting agreements for funding. The reason quite simply being is that if a high net worth individual should choose to invest in 8 – 10 companies, the total legal bill could turn out to be over £50,000.00 (assuming a lean estimation of £5K per company which is low!)


Investment Proposal

Receiving successful venture capital funding can provide a lot more than just money to the start-up. They can bring a wealth of managerial talent and experience that can advise you on external growth and how to jump over major pitfalls.

This professional advice can be a massive boost for a young company looking for every competitive edge. Another major benefit of Venture Capitalist’s Capital is that their network of contacts could end up making all the difference in a successful exit (or not). 

But always remember what being funded by a Venture Capitalist actually means. After they have invested millions into it and regardless of whether or not they actually hold a controlling interest in your company, they will be in control of your organisation and will have a lot of power over how the company runs and how they will get their money out. You will be forced to go down directions that you may not be too happy with.

....So better with an Angel Investor? Or Venture Capital?

More often than not, it’s best for an entrepreneur to start up on their own or with the help of an Angel Investor (or syndicate if the investment requirement is too large to be funded by one individual). After running and evolving the business, the next best course of action is turn to Venture Capitalists when you believe you are ready to take your company to the next level and will need a serious amount of capital to do so. Before even considering approaching a Venture Capitalist, you will have to demonstrate that you have a degree of success in your past, which is where the first round of your funding and management of your cash flow will come in handy.

When you do decide to approach venture capitalists and if by some miracle should they agree to back you, then it will be crucial on your part to seek-out the best legal advice that you can afford for the ensuing negotiations. One sentence or even a phrase within the initial contract can determine your success or failure. Venture Capitalists are consummate professionals, and you will have to become one before playing in their league.

By Rishi Anand

Rishi Anand is a successful UK based entrepreneur and is the Founder of Venture Giant. 
He is currently the driving force behind the commercialisation and globalisation of www.venturegiant.com with plans to launch the service in India and Australia.