Companies that benefit most from venture capital are those that have a disruptive technology or product that they aim to grow very large very quickly. Entrepreneurs who benefit most from venture capital are those who want to create a great new company and do not need to retain full control over it as it grows.
Companies that have a tried-and-true product or service might not benefit from venture capital. Venture capital also might not be right for the company owner who likes to retain primary control or has always dreamed of handing the business down through generations.
When you work with venture capital, you make tradeoffs: You control less of the company and receive less of the total cash after your company sells. On the plus side, you have a support system of smart VCs, and your risk is distributed among more people.
Identifying a good venture business
Your traditional coffee house, clothing store, photography business, landscaping business, restaurant, real estate development company, and filmmaking company don’t make sense as venture capital-backed companies. Different kinds of industry-specific investors put money into those types of companies.
Venture capital tends to invest in companies built around software, drug developments, medical devices, engineering devices, and other cutting edge technologies that are considered disruptive to current markets. (Disruptive technologies are innovations that could not have been predicted; therefore, their effect on the market as a whole cannot be predicted either.)
VCs look for disruptive technologies because the potential for a huge return on investment is greater when the business hinges on very risky technology or market integration. High risk can equal high reward.
Of course, not all technology companies should be venture capital–backed companies. Many of technology companies would do well to grow organically — that is, without large investments of capital — and develop at a slower rate.
Organically grown companies can be big winners, too. In fact, if you can get your company to profitability without taking outside investment, you may stand to make more money.
Looking at alternatives to venture capital
If you decide that the mega-high growth, high stress, venture-backed start-up company lifestyle isn’t what you signed up for, you can grow your company as a small-to-midsized business (SMB). Compared to venture capital–backed companies, SMB companies tend to require a lot less capital, grow more slowly, and remain more stable as they grow.
Smalls business have lots of different ways to raise money, including through bank loans, crowdfunding, friends and family, grants, and franchising.