Why Do Small Businesses Prefer Venture Capital Investing?
It is often said that a entrepreneur will turn to venture capital financing when conventional financing methods fail. Yet, if this is true, why do small businesses sometimes prefer venture capital investing?
Why do small businesses prefer venture capital investing? It is so often assumed that an entrepreneur seeks conventional financing first, and turns to venture capital when all else fails. The answer comes from the idea of value added financing. Since venture capital investors will insist on equity interest and some degree of management control as part of the financing package. Many entrepreneurs stubbornly refuse to give up any control until they have no where else to turn.
The stubborn entrepreneurs will insist on their own right to fail as long as they fail on their own. This might seem a respected idea of self reliance, but it is not very sound investment strategy. The idea of a good investment is to succeed in anyway possible and using every resource available. This should apply to the entrepreneurs own investment of his personal funds, his time, and his ideas. A bank or conventional lending institution does not want any of their customers to fail. They even offer some limited help to their customers. Even so, they have covered themselves with collateral and notes and they handle so many accounts that the client is, more or less, on their own.
The venture capitalist, on the other hand, has a very vested interest in the success of their investment deals. The equity position they hold in the company enables to guide the company toward that success. They have the resources and the expertise to insure a return on their investments. Many companies can bring to their clients an entire network of related enterprises that can form a support system and mutual opportunity clearing house. This is known as value added financing. The cash is supplemented with a number of things that make the investment more valuable beyond the increase in the cash on hand account.
A smart entrepreneur will view this value added idea as worth the surrender of a bit of control. In most cases, the entrepreneur has expertise in the particular category of the company, while the venture capital partner has expertise in making businesses profitable. Together, they can make a team that insures that everyone benefits. The chance of failure is greatly reduced because the venture capitalist can no more afford that possibility than does the entrepreneur seek it.
There is room in business for the stubborn. An entrepreneur can be stubborn in his unwillingness to fail. They can be stubborn in pushing their company toward profit and they can be stubborn in resisting any temptation to surrender their dreams. They can not be stubborn in thinking their limited managerial experience does not matter. A wise business owner might prefer venture capital and be willing to surrender some equity for the value added attention and commitment to success of his new partners.