When Edward Sullivan founded Aria Systems, a cloud-based subscription billing company, he raised $100 million with venture capital firms (VC) during several rounds.
Sullivan is based in Philadelphia. As the company quickly grew, his VC funders encouraged him to open an office in San Francisco, which he did. After his second round of venture capital funding, the company began to grow even more quickly, and this growth continued at a rapid rate.
His investors wanted him to move to California to run the company. Sullivan couldn’t do that, though, because of family commitments. So, he ended up stepping down as CEO and is now on the board instead.
Fast forward to today, and has started another company called Trust Exchange. This time around, he’s funding the company differently. So far, Trust Exchange, a B2B social network that allows businesses to exchange information directly, has raised $1.5 million through Angel Funding.
Venture capital funding worked well with Aria Systems, which remains a successful company, but it had some pitfalls for Sullivan, who would’ve like to stay on as CEO.
What is venture capital?
Venture capital, or VC, is a type of financing provided by VC firms to early-stage businesses with a potential for high growth.
High growth is the key phrase for VC investors. They want to invest a large amount, see rapid growth, then sell the company and make money. For VC investors, an 8 million dollar company, or even a 20 million dollar company, isn’t worth their time.
Sullivan says you need to know how much you’ll be able to sell your business for. “If you think you can be a billion-dollar business, then definitely go with venture capital firms. If the max is $100 million, or less than a billion, you might want another option.”
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Pros and cons of VC funding
| Pros|| Cons|
As a JD and MBA, Jeff White has spent the majority of his career either operating small businesses or helping them through M&A transactions.
White says, “Like any type of financing, there are plenty of pros and cons to taking the money from a VC firm.” White took a thorough dive into the pros and cons of VC funding and shared his insights with us.
Here are the four main pros and cons you need to know before deciding whether or not VC financing is right for you:
1) Business growth and sustainability
With a VC firm, you’ll get the money you need to grow and sustain your business. White says, “Most businesses fail or run out of money before they’re able to realize their potential.”
He adds, “With the online boom of businesses over the last 15 years, VC firms have played an instrumental role in helping businesses stay in business and get the time they need to fully develop their product and service. VC firms have saved many businesses that we all enjoy today.”
2) No debt or monthly payments
The money you receive from venture captial firms isn’t a loan, so there’s no debt and no monthly payments.
3) Experienced professionals to help grow your business
Venture capital firms typically have experienced professionals that can have a huge impact in helping your business realize its full potential.
4) Free media coverage
When you get money from VC firms, you typically get a lot of free media coverage. White says, “This helps your business grow organically and get recognized by a lot of potential customers, which could have otherwise taken you years to reach.”
1) Venture capital firms will take a seat on your company’s board of directors
White says, “They’ll likely want to be heavily involved in the decision making process of your business, and may not allow you the time you want to spend on your product.
They need to see a return on their money, and can start making your dream feel more like the job you might have already left. Some owners lose control entirely when they take out VC money.”
2) Might have to partner with someone they choose for you
VC firms might want you to bring on another partner of their choosing to run the business.
3) VC money comes with expectations
White says, “Since you’re now under a microscope, your business will be expected to grow and start turning a profit a lot quicker than you might have expected it to.”
4) Some business owners lose the joy of owning their own business
Sometimes the stress of dealing with a VC firm can be too much, White says. This can take the excitement out of being a business owner.
Sullivan adds that the rapid growth and monetary expectations can be a big problem depending on your company’s situation. He explains, “One of the challenges of VC is to grow in a very specific period, or fail. You can’t really grow organically. They have a fund and you have to return the money within a certain period of time.”
In fact, Sullivan says VC investors want you to fail fast if it’s going to happen. “They would rather have you fail fast than five years from now.”
Alternatives to Venture Capital Firms
Sullivan says it can be hard for startups to get a business loan since you need to show existing revenue or assets. He adds, “If you’re an entrepreneur, they’ll want you to put your personal assets on the line. I need $4 million, and my house isn’t that big,” he laughs.
Angels are wealthy individuals, rather than giant firms. They can be a good option for smaller startup companies.
Initial Coin Offering (ICO)
Sullivan is considering an ICO in addition to his angel investments. Think of an ICO as a kickstarter or crowdfunding campaign, using Bitcoin or other cryptocurrencies instead of traditional funds. There are dangers to this method, which is fairly new, but also huge potential.
In addition to seeking funds from venture capital firms and Angel investors, expand your research to increase the odds of successfully financing your startup.
Finding out what you qualify for is a good place to start. By doing so, you’ll know which direction to go in to find your best option. It’s a simple, quick process and it won’t hurt your credit score.
Then, head over to SuperMoney’s business loan page where you’ll find detailed reviews on top lenders, including real-user ratings, all in one place. Compare them side-by-side before making your final decision.