Startup Capital: Pros and Cons of Venture Capital and Private Equity

This article is part three of the Factor King® blog series “Startup Capital: Sources of New Business Funding” which explores the most common financing options for a business in need of startup capital, expansion capital, or short-term cash flow.

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IStockPhoto.comTypically provided in early stage startup companies, venture capital or private equity comes from an investment group or angel investors interested in having ownership interest in exchange for the funds given. It’s commonly given to startups that are high-risk yet offer a potential for a large return on investment. The following are the pros and cons to accepting this type of business funding.

Pros

• Greater Funding: VC funding offers large sums of capital not otherwise possible to obtain through conventional methods. However, this does come at a higher price as you’ll see in the cons below.
• Expertise and Industry Connections: VC Firms are well connected and run by savvy business executives with a wide sphere of influence. As a result your business can benefit by access to these professionals and their expertise.

Cons

• Higher Rate of Return Required: Because venture capitalists take a higher risk lending greater amounts of money than a conventional entity and most often to companies still in a startup phase of development, the expectation for a return on the investment is that much higher. As a result, a business on the receiving end will feel tremendous pressure to perform.
• Lengthy Approval Process: Most private equity entities require full disclosure in advance of approval including looking in great detail at the company’s management team, market, products and services, operating history, corporate governance documents, and financial statements. This due diligence process can take months, with no guarantees that a business will even get funded.
• Loss of Control: In most instances, the only way to get venture capital or private equity is by giving up a significant share of your company - which also can result in the loss of controlling interest. With venture capital funding, all business operations can fall under scrutiny and often require a change in management.

According to Frank Skelly of Factor King®, “It’s important to know what you’re getting into when you decide to pursue venture capital. The risks of losing controlling interest of your business are great with no guarantee that the infusion of capital will be of benefit. In addition, the stress of implementing organizational change can result in the loss of key team members.” Skelly goes on to advise, “Factoring is a great alternative to private equity as it allows for the same large amounts of funds as private equity without the due diligence process and loss of operational control.”

In case you missed it, check out article two of the series to learn the pros and cons to obtaining a traditional bank loan.

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About FACTOR KING®
Did you know that Factor King® offers a quick and easy way to get cash for your business without giving up control? Factor King is a direct financial service provider that specializes in the Factoring of invoice receivables for companies that maintain commercial accounts receivables. We can manage your record keeping and offer fast processing of accounts receivable payments.  Apply now to convert your company’s assets into immediate cash!

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Startup Capital: Sources of New Business Funding
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