Venture capital has gained tremendous importance due to the explosion of the startups, venture capital refers to that source of finance which is provided by private firm or individuals to those businesses which are new and have a unique idea. Venture capital can be compared with established directors giving break to young and talented actors and if the movie turns out to be successful then it will result in windfall for the producer and director of the movie as fees of new actors is very low as compared to seasoned actors, in the same way if new idea or business clicks then it will result in windfall for the venture capital investors. In order to understand this concept better let’s look at some of the advantages and disadvantages of venture capital –
Advantages of Venture Capital
- The first and foremost advantage of venture capital is that company which is new has difficulty in raising funds both from equity and debt market and an idea without funds is similar to bank account without money. Hence as far businessman who is talented and has the business idea but no money venture capital is a blessing as it makes sure that idea does not remain in the mind only but turns into business.
- As far as venture capitalist is concerned venture capital investment can be very fruitful because if company turns out to be successful then the stake of venture capitalist generate returns ranging from 50 to 500 percent per annum which is far greater than any other investment and that is the reason why venture capitalist take that leap of faith in new and promising business.
- Another advantage of venture capital is that business gets the expert opinion of venture capitalist as they are into the market for a long period of time and their experience comes in handy during crunch situations. Hence venture capitalist does not provide only capital but they also give their experience to new business which is a crucial aspect as far as new business is concerned.
Disadvantages of Venture Capital
- The biggest disadvantage as far as new firms is that it leads to dilution of control as venture capitalist takes stake in the business and due to their stake they tend to interfere more than desired in the day to day activities of the business and the owner who started the business feel suffocated as he or she cannot take decisions independently.
- Venture capitalist tend to hurry for listing as they want to offload their stake as soon as possible which in turn results in the company getting lower valuation because if the listing is not done at the right time then it will lead to an undervaluation of the company leading to a loss for the owner of the company.
- As far as the venture capitalist is concerned majority of startups fail and only a small percentage of companies go on to become a successful enterprise, hence one should not make this mistake of thinking that every deal is profitable and venture capitalist always makes money.
As one can see from the above that venture capital has advantages as well as disadvantages and any company looking for raising funds or capital from venture capital or venture capitalist looking to invest in the new companies should look the above points carefully and then decide the future course of action.