Venture Capital Advantages And Disadvantages

A venture capitalist generally invests in companies and startups which are still in a stage where their business model needs to be proved viable, or they need resources to scale up. Thus, those companies present high risks, but the potential for exponential growth. Therefore, venture capitalists look for startups that can bring a high ROI and high valuation multiples.

A glance at venture capital investing

The set of investments venture capitalists make; only a few will succeed. Therefore, they have to place more bets to make the system work in their favor.

In the end, the venture capitalist makes money (the so-called exit) by either reselling the stake in the company at a much larger valuation or with the IPO of the company they invested in.

When that happens, venture capitalists make substantial returns for their partners. Indeed, the venture capital firm is usually comprised by a group of partners which raised capital from another group of limited partners to invest for them.

The limited partners (or LPs) can be either large institutions or wealthy individuals looking for high returns.

Usually, venture capital firms invest in growth potential. Therefore, when a startup receives venture capital money, the venture capital firm – usually – expects aggressive growth.

Before we get to the advantage and disadvantages of taking venture capital money, let’s first understand the explicit and hidden incentives that drive venture capital firms. Indeed, at the end, taking venture capital money is mostly about interests alignment.

And if those interests do not converge, that is when probably it might be not a good idea to take that money.

Understand the venture capital incentives

To understand how venture capital works, we need to look at the two resources that they allocate:

  • capital;
  • and money

Time, because VCs funds, compared to other models, where financial resources are endowed, do contribute to the growth of the firm they invest in. This contribution can come in several ways, from assistance in hiring to providing guidance, or also having a VC on the board.

On the other hand, VCs provide capital for funding the scale of those startups.

Why is it important to understand the two essential resources? Well, while capital might be a relatively scalable resource, assuming VCs can bring in continuously limited partners.

Time is not. Indeed, VCs usually run out of capacity in managing a certain number of investments as those investments need to be also managed and supported.

And in general, VCs look for a return anywhere between 3-10 years, depending on the market condition, startup growth and more.

Which means they also look for 10-30x ROI in a 5-10 year timeframe.

Therefore, a few aspects we can highlight so far:

  • venture capital have limited time resources to allocate due to the fact they can only manage a certain number of investments (as they provide several forms of support to startups);
  • they look for extremely high returns (10-30x in the lifespan of the investment);
  • those returns can happen anywhere between 3-10 years depending on several conditions (this means in this period VCs will ask for aggressive growth)

Let’s look now at the advantages and disadvantages of getting VCs’ money.

Advantages of VC money

Some of the key advantages can be summarized in a few key points:

  • Guidance and expertise: usually VCs don’t bring just cash on the table but also the expertise of the team and partners part of the fund, which is one of the primary advantages of getting VCs’ money.
  • Rapid Growth: if you’re looking for rapid growth, VCs will look for the same thing. Thus, you’ll both be aligned in terms of objective, which makes it easier to make this sort of agreement work.
  • Connections: VCs will introduce you to the right people to unlock growth potential, which is another undeniable advantage.
  • Hiring: the VC investing in your company can also help you find the right people to form your team and scale.
  • Additional support: in some cases, VCs support can also come in other areas that are important to grow smoothly, which include legal, tax, and accounting matters.

For all these reasons, VC money makes sense. Let’s see when it doesn’t.

Disadvantages of VC money

There are  two significant disadvantages in taking VC money:

  • Loss of control and ownership: this is by far the most significant disadvantage as if you let VC in it means you need to be ready to give up some or a good part of the control. Therefore, you won’t be the only one in charge of the company’s vision and mission, but you’ll need to share that with the VC.
  • While it is legitimate for VC to ask a high ROI for a risky startup which business model still needs to be proved viable. A very High ROI and an excessive push on growth might break things up. Remember that, companies, like products, might have a lifecycle and forcing too much on growth might well make the company implode.

When does it make sense to take venture capital money?

In a post entitled “The only thing that matters,” venture capitalist Marc Andreessen explained:

The only thing that matters is getting to product/market fit.

Product/market fit means being in a good market with a product that can satisfy that market.

How do you assess whether you passed through this product/market fit stage?

Marc Andreessen explained:

You can always feel when product/market fit isn’t happening.The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.

Therefore, there is no single way to measure that, but as Andreessen emphasized:

And you can always feel product/market fit when it’s happening.The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.

And he highlighted something that would stick as a paradigm in the startup world for years to come:

Lots of startups fail before product/market fit ever happens.

On FourWeekMBA, I interviewed Ash Maurya, author of Running Lean and Scaling Lean and creator of the Lean Canvas.

As he explained to me:

This is (when to take VC money), of course, going to be a function of the kind of business model and product that you have. If you can bootstrap, if you can go all the way to product market fit and then raise money, you maintain the most control in your company. You have a lot of say in where the company goes from that point on.

And he continued:

In an ideal world, and it’s not just me, even the venture capitals and other angel investors will give you the same advice. The best ideal time to raise your big round of funding would be as you cross product-market fit.

Once you have product-market fit, some success is guaranteed. The question is how big can it get?

The other thing that’s also going in your favor then is that your goal, you being the entrepreneur or innovator, your goal and the investor’s goals are completely aligned. It’s all about growth.

You have figured out the product, you have figured out the customer, now it’s really engines of growth.


Thus, if you were in the condition to bootstrap – grow with your resources, or with a profitable business model – your company is in a perfect place to be.

You can decide whether to move to the next stage (scale), thus take VC money. Or keep growing organically.

And he also highlighted:

If you were doing something that required capital investment upfront, this is where VC makes sense, but there is now, increasingly so, a very mature market of other investors that play in that space.

Those would be super angels or angel investors that understand that you still haven’t reached product-market fit and you are going to be learning and pivoting and course correcting, and they tend to be more patient for those types of things.

What questions to ask before taking venture capital money?

Therefore before taking VC money, I would ask the following questions:

  • can I validate the idea without external resources?
  • Is the product technically complex that it requires additional resources to develop?
  • Do I need money to scale?
  • Am I ready to give up part of the control of my business?

In short, if you are a control freak, and you want to keep your vision of the company intact, VC money might not be the best option. If you’re willing to give up some control in exchange for money and expertise that might make sense.

In other cases, if you managed to bootstrap your way to product/market fit you might be in a good position as VC will want you. Thus, you will be able to negotiate better deals.

In the case in which you need a long term perspective to grow your business and still be in charge of angel investing or “super angels” might be a better option.

In all the other cases, bootstrapping is the way to go!

Other business resources:

Connected Investment Models

Angel Investing

An angel investor is usually a high net-worth individual who invests in early-stage start-ups in exchange for equity in the company. Angel investors are wealthy private investors focused on financing small business ventures in exchange for an equity stake. Unlike a venture capital firm, an angel investor invests their own capital during the early stages of a start-up when the risk of failure is relatively high, yet it might in the long-term unlock higher rates of return.

Venture Capital

A venture capitalist generally invests in companies and startups which are still in a stage where their business model needs to be proved viable, or they need resources to scale up. Thus, those companies present high risks, but the potential for exponential growth. Therefore, venture capitalists look for startups that can bring a high ROI and high valuation multiples.

Economic Moat

Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Meme Investing

Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.

Payment for Order Flow

Payment for order flow consists of a “kickback” or commission that the broker routing customers to a market maker (in charge of enabling the bid and ask price) will pay a commission to the broker as a sort of market-making fee.

What is a SPAC

A special purpose acquisition company (SPAC) is a company with no commercial operations that are created to raise capital through an IPO to acquire another company. The SPAC is also called for that reason a “blank check company” as it will use the money provided by investors to enable private companies to go public via the SPAC.

Connected business frameworks

BCG Matrix

In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.


Benchmarking is a tool that businesses use to compare the performance of their processes and products against businesses considered to be the best in their industries. Benchmarking allows a business to refine their practices and thus increase its overall performance. Generally, benchmarking can be broken down in the process, performance, and strategic benchmarking.

SWOT Analysis

A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

PESTEL Analysis

The PESTEL analysis is a framework that can help marketers assess whether macro-economic factors are affecting an organization. This is a critical step that helps organizations identify potential threats and weaknesses that can be used in other frameworks such as SWOT or to gain a broader and better understanding of the overall marketing environment.

Porter’s Five Forces

Porter’s Five Forces is a model that helps organizations to gain a better understanding of their industries and competition. Published for the first time by Professor Michael Porter in his book “Competitive Strategy” in the 1980s. The model breaks down industries and markets by analyzing them through five forces

Scenario Analysis

Businesses use scenario planning to make assumptions on future events and how their respective business environments may change in response to those future events. Therefore, scenario planning identifies specific uncertainties – or different realities and how they might affect future business operations. Scenario planning attempts at better strategic decision making by avoiding two pitfalls: underprediction, and overprediction.

VRIO Framework

The VRIO framework is a tool that businesses can use to identify and then protect the factors that give them a long-term competitive advantage. The VRIO framework will help assess reality based on four key elements that make up its name (VRIO): value, rarity, imitability, and organization. VRIO is a holistic framework to assess the business.

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