You have thought about using a venture capitalist to fund your start-up. What are some preliminary questions you should answer to prepare yourself?

A venture capital (VC) fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

What are the cons of using a VC?

A VC will highly scrutinized your company’s governance and performance. Essentially, you will partner with a third-party in exchange for capital. This means you will lose ownership and control. For example, if you company is performing poorly, your VC may fire your CEO.

What are the pros of using a VC?

On the other hand, most VC’s have extensive business knowledge and access to resources and valuable contacts. So, while you are losing control, you are gaining business value and expertise.

What will the VC look for?

VC’s, are generally looking for a 10x return on their investment. Will your company experience significant growth or this a lifestyle business which provides you with a comfortable living? Can you provide a detailed budget to support your claim that your business will experience such significant growth.

The VC will review your company’s financial documents to determine whether your team expertly understands your business operation, management, and metrics. A VC will compare your company to other public and private companies in your market, as a benchmark.

Alternatives to VC:

Bootstrap –can you reach certain milestones without venture capital? Can you spread the cost of a large purchase over a longer period of time (such as a lease)?

Friendlier sources of capital–government, banks, credit unions, friends, family, savings

Existing Funding Relationships -do you have a relationship with funding sources that will be more receptive than VC?

You should decide to seek venture capital only after considerable thought and planning.