Both Venture Capital funding and Corporate funding have their advantages and disadvantages. Choosing the road to take depends upon the vision of the founders for the startup.
Large corporations have been investing in startups for a long time now. Whether it is a good idea for both the parties involved is debatable. Startups have an innovative edge and offer exciting technological advances. However, once large corporations start funding startups, they often consider channeling the technology into their existing business. The change in direction narrows the window of innovation both for the corporate funding firms and the startups. As a result, many early-stage startups lose their distinctiveness and goals that they had and thereby attracted corporate funding.
Corporate funding for early-stage startups and its effects are more glaring in the field of biotechnology where the patent filing seems to change from the existing field to the one which is in the line of business of the corporate investor. The most recent case being BioNTech, which recently considered an investment from Pfizer for putting its RNA technology into a Covid-19 vaccine. Innovations also need to go through a long process of clinical trials, regulatory approvals, and many other long processes which means that early-stage startups need a tremendous amount of essential resources and funding. They end up diverting towards the incumbents’ domain and create products that are more in sync with their investors.
What is Venture Capital funding?
A startup with a good track record or an excellent long-term potential seeks investment from venture capitalists. This means that an investor puts money into the business, seeks a stake in the business, and will also be a part of the board. Wealthy individuals and investing institutions (VC Funds) invest money in startups for a better ROI.You will find more infographics at Statista
Advantages of Venture Capital funding
Helpful in expansion
VC funding enables companies to invest in expansion. Bank loans are another way of seeking funds for expansion. However, bank loans require collaterals, and then it requires repaying. So the best bet for a startup would be venture capital funding since the investor takes the risk.You will find more infographics at Statista
Seeking venture capital also includes guidance and expertise of the member from the Venture Capital firm. This enables startups to seek – technical guidance, more resources, build strategies, and take calculated risks.
Venture Capital firms have a business community which means a vast network, access to alliances, business houses, and potential customers.
Disadvantages of Venture Capital
Dilution of Control
Venture Capital firms will have a representation on the board once they invest in startups and expect stakes in the company equity. All major decisions require the consent of the investors.
Early Cash In
Venture Capital firms usually redeem in three to five years since their primary goal is to earn capital gains from their investments and, it may not be a good choice for a business looking for long-term liquidity.
The startup/ business owner provides a business plan. The Venture Capital firm analyses the plan, and a meeting is held to discuss it further. The VC firm conducts a thorough check on the business and offers the terms to the startup owner. The partnership begins once both the parties are on the same page meaning, it involves a tedious process.
Venture Capital is the way forward for Early-Stage Startups
Both Venture Capital funding and Corporate funding have their advantages and disadvantages. However, a founder needs to understand that VC funding may not be suitable for an early-stage startup if it seeks liquidity for more than five to seven years. Venture Capital firms consider selling their shares or exit through IPO at the end of the term. They may or may not offer a lump sum amount at the signing or release funds in different time blocks depending upon the terms signed.
Watch: Understanding Venture Capital
Corporate funding also comes with industrial expertise, access to a massive network, and a few other advantages similar to venture capital funding. However, slow movement/ process due to multiple stakeholders’ involvement, diverted interests, and a few other limitations make it challenging for a startup to stay true to its ideologies, thought process, and goals.
Both venture capital funding and corporate funding have their benefits and limitations. Startups may find it helpful to seek funding from a VC firm due to its suitability. It is essential to conduct extensive research and consider the most suitable options in the existing scenario to make a well-informed decision.