Take on Venture Capital and Keep Control of Start-Up

An Original Article from SBA.gov

Considering options for funding your start-up? Wondering if now is the right time to seek venture capital, but worried about losing control of your business?

Here are some tips for weighing your funding options, finding the right venture capital firm for your needs, and working with them once you’ve received your first injection of seed money.

Is Venture Capital Right for Your Small Business?

If you are looking for funding under $200,000, smaller angel investors (this could include borrowing from family and friends) or peer-to-peer lending or crowdfunding might be better options than a larger VC firm. Other alternatives include SBA loans. SBA doesn’t provide the loan; instead, they provide a repayment guarantee to banks, removing much of the risk of lending to small businesses. If your business is engaged in a high-tech industry or R&D, another option is a Small Business Innovation Research Grant. These federal funds support the critical start-up and development stages of small businesses.

Finding the Right VC Firm

If you have a proof of concept and are ready for a significant investment to fund your next stage of growth, then venture capital (VC) might be for you. But how do you find the right VC firm with which to align your business?

Given that a VC firm is going to be involved in your business’ funding and management, choosing one that provides a good match for your business is critical. Look for companies that have experience with businesses and industries like yours. Since a VC is going to be actively involved in your business, other factors such as its personality and core values are also important. A VC that is located close by might also be important.

So where can you find potential VC investors? If you have a good network then there’s a strong likelihood you can pinpoint potential investors via this route. Start locally and extend your search from there. Here are some tips and resources that can help:

  • Start in your Community – If you are involved in a local Chamber of Commerce or other small business group, start your search here. Talk to experts and business peers alike. Small Business Development Centers (SBDCs) and Women’s Business Centers may also be able to help introduce you to local investors. Find a center here.
  • Talk to Your State Economic Development Agency – At the state level, State and Local Economic Development Agencies may be able to help refer you to investors in your region.
  • Consider Trade Associations – Most industries are represented by a trade association, this is another great place to expand your search and meet potential investors. You can also look into national and local investing and venture capital groups like the National Venture Capital Association and the Angel Capital Association.

Your next step is to present any potential investor with a business plan.  SBA’s online Build a Business Plan tool can help you create one.

How to Maintain Leadership Control of Your Company

Many small business owners are reticent to invite VC funding because they’re concerned about losing control of their business. While it’s true that a VC firm will insist on controlling more than 50 percent of an early-stage entrepreneurial enterprise—does this mean you actually relinquish control of your business? Not necessarily. VC deals are structured around mutual incentives and milestones that are beneficial for all, and are rarely about one-sided control. VCs want business founders to aspire to grow and succeed, and they structure the financing deals to ensure this. For example, the terms of typical VC financing dictate that the investors don’t realize a profit until management does (assuming that they’ve already seen a return in capital invested) and vice versa.

Another emerging trend, as reported by the New York Times, is that VCs are increasingly putting a premium on young, visionary entrepreneurs who grew up with the Internet, social media and mobile technologies. With this clout behind them, these young founders are becoming more assertive in funding rounds, securing better terms and even cashing out their investors before an initial public offering.

That’s not to say your VC can’t move to replace you if your business isn’t performing or hitting key milestones. Some other things you can do to ensure you retain some level of control include the following:

  • Insist on an Employment Contract – This can minimize the risk of founders getting fired by their board of directors. Negotiate this before any seed money has exchanged hands.
  • Hire Stellar Employees – Poor staff will compromise the success of your business and jeopardize your position on the management team. By hiring right, you’ll ensure key milestones are understood and met, and profits are realized.
  • Collaborate with your Investors – In addition to funding, investors bring a wealth of experience. Capitalize on this and treat your VC as a partner—not as a threat.

For other tips, read Surprising Ways to Maintain Control of Your Business with Investor Approval from Yahoo Small Business Advisor.

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