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Understanding strengths and weaknesses of venture capital

Sometimes, an entrepreneurial company in Miami, Florida, needs to find funding but does not qualify for traditional asset-based lending sources such as banks because it is too new or small. Venture capital may be a viable alternative for these businesses. This type of funding involves selling shares of the company in return for the financial support necessary to operate. The shareholders also receive the ability to have an active role in the company.

Venture capital involves a number of factors that should be considered carefully. According to the U.S. Small Business Administration, venture capital typically diverges from traditional funding in the following ways:

  •          It makes high levels of funding available to smaller companies and startups
  •          Lenders provide equity capital instead of debt
  •          Returns are potentially much higher, but so is risk
  •          Lenders actively monitor the company’s portfolio and often offer expertise and guidance
  •          Payments are not required, so the business has more funds for growth

A company that receives funding from one venture capital firm may discover an open door to other investors, as well. Entrepreneurship.org points out that venture capital has potentially negative consequences for small businesses and startups, as well. For example, a venture capital firm may take much longer to reach the decision to purchase equity in a company than a traditional lender, so the delay in funding could cause problems. Venture firms also frequently want a significant amount of control over the company, which could result in the inability of owners to make important decisions over the way the business is run. 

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