South-Western - Management  
Venture Capital: The Good, Bad, and Ugly
Topic Entrepreneurship
InfoTrac Reference A148327598
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Key Words Venture Capital, venture capitalists, small business
News Story

For a start-up business that has gone far enough to have a product that customers want, a business model that works, and a management team that knows what it is doing, venture capital can provide the luxury of not having to watch every penny. Entrepreneurs considering this option need to realize that the money does come with strings attached, however. Here are some of the positive aspects of venture capital:

  1. experience, advice, and mentoring from experienced business people
  2. objectivity about a closely-held project
  3. networking opportunities
  4. help with recruitment
  5. credibility that comes with strong financial backing
  6. shared risk
  7. big picture perspective that can be tough for entrepreneurs to have
  8. exit assistance
Downsides include:
  1. mandatory exit: venture capitalists are in the business to make money and will sell the company or take it public to get the return they seek. Their financial gain will always be more important than personal relationships.
  2. loss of independence
  3. they will have the right to fire you or your management team
  4. the possibility of onerous conditions
And then there’s the possible ugliness:
  1. VC conflicts
  2. ethical conflicts
  3. unfulfilled promises
  4. egos
The bottom line for small business owners is that venture capital can be the answer your company has been looking for, or it can be your worst nightmare. Your choice is to finance your startup yourself and stay small, or take the risk and raise venture capital. Just be aware of the potential downfalls as well as the upsides before you make your decision.

Questions
1.

What is venture capital?

2.

Why would an entrepreneur seek out venture capital?

3.

What are the pros and the cons to seeking venture capital for a small business? What rules of thumb would you give to a entrepreneur who was considering seeking venture capital for a business start-up?

Source “Venture Capital: The Good, Bad, and Ugly,” Business Week Online, July 18, 2006, pNA.
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