Running a successful startup isn’t everyone’s cup of tea, especially when there is cutthroat competition. Many startups in India often struggle to sustain their growth and survive as the business giants have massive funds to pump into their operations and marketing, which isn’t the case for early-age startups. Therefore startup founders often turn to various options to finance their startups. If you are already familiar with the startup ecosystem, you must have heard about venture capital, venture debts and startups receiving seed and series funding. But what is venture capital, and why is it a better alternative to structured loans? Read on to find out.
What is Venture Capital (VC)?
Venture capital is a financing type where investors invest money in startups that have the potential to grow over the long term but are still in their early stages. Most of the time, seasoned investors that have supported businesses for a considerable amount of time (10+ years) offer venture capital. Although most of their investments are in the form of money, they also provide founders with strategic mentorship, technical and managerial advice and strategies. As many startups, especially in invention tech, are started by young entrepreneurs, they need guidance across many startup operations. A venture capitalist mentors them across these operations and helps them optimize operations, build a strong business model and scale, generating more revenue. They provide the founders with venture capital funding in return for the equity in their business. The capital helps them develop their product if they are in the initial stage, and for established startups, it allows them to hire a team, invest in marketing and scale the business.
How is venture capital a better alternative to structured loans?
Structured loans from banks are one of the conventional ways to finance a business. The founders must repay the principal amount and the levied interest and probably need to put something as collateral to secure the loan. Banks often don’t understand the startup’s business model and reject their applications. They also look at revenue streams to determine whether the company would be able to pay them back. But most startups, especially the ones in their early stage, don’t have established operations or revenue models, which is a big no for banks. Therefore venture capital offers a much better alternative for financing a startup. Here are some points that highlight why VC funding is a better alternative to structured loans.
Larger capital amounts
One of the major advantages of venture funding is the possibility of raising larger capital amounts. It can be challenging for an early-age startup to qualify for small business loans, while many startups may receive $5 million or less in VC funding. However, seed-stage enterprises can access venture financing for as little as $100,000, while more established businesses can access more than $25 million. Additionally, entrepreneurs have a propensity to raise venture capital multiple times, giving companies access to significant sums of money that would be otherwise impossible to obtain, especially from a bank.
No monthly payments
One major issue with structured loans is the monthly payments. When you receive a loan from a bank, you have to pay them monthly installments of a fixed amount, including the interest and some chunk of the principal amount. A VC firm will invest in your company in exchange for equity. That means your company won’t be required to make monthly payments, unlike personal or small business loans. As a result, your business will have more working capital to reinvest in developing your products, expanding your workforce, or growing your business operations.
Experienced mentorship and leadership
After exiting their companies, many successful startup founders join venture capital firms as partners. These people have prior business growth, problem-solving, and financial performance monitoring experience. As a result, they can serve as essential leadership resources for the businesses in which they have investments.
Receive help to acquire future funding rounds
VC firms are eager to see your company obtain more money at a greater valuation because it raises their ROI. They can expose you to other firms and VC investors that will be better able to help you in the future and offer more funding. Venture capital firms frequently reserve the right to participate in subsequent investment rounds and often provide extra funding as your company expands.
Thanks to the thriving startup ecosystem in India, numerous top VC firms are operating and offering capital for budding startups. Founders must weigh the benefits and make the right decision between VC funding and structured loans to ensure the best growth of their company.
