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Risks In Venture Capital Funding

Although venture capital has many advantages, it is essential to take a look at the risks in venture capital funding, before you start. One has to be aware of them when you agree to take on investors. Let us take a look at some of the drawbacks in venture capital funding in this article.

As Venture capital funding is a type of private equity capital in general provided by outside sources. Most venture capitalists will try to realize their investment in a company within a period of three to five years. Therefore, if your business plan has a longer timetable before it is able to provide any liquidity; venture capital may not be the right option to go for.

Here are some of the main venture capital funding risks:

Product Risk: The products concerned may have little or no track record in the markets as they are largely untested and usually have high obsolescence rates.

Entrepreneur risk: another of the disadvantages of venture capital funding is that it is difficult to evaluate the new management and new business application without any prior track record

Concentration risk:
Focusing on small market, which can relate to either the product or in geographical terms, raises exposure to sectoral downturn

Technology risk: hard to assess new technology on small set of products

Duration risk: Generally a longer long-gestation period for funding is needed.

Asset risk: Due to a high percentage of fixed assets with high obsolescence, along with a high fraction of human capital, there is a lack of collateralizable assets, which is one of the drawbacks in venture capital funding

 Small deal size : This is not found economical by most investors

Entrepreneurs should also consider the following factors to cover the main risks in venture capital funding:

  • Pricing - Venture capitalists characteristically being more sophisticated may impel a harder bargain.
  • Intrusion - Venture capitalists are more likely to want to be in charge of the strategic direction of the company.
  • Control - Venture capitalists are more likely to be interested in influencing the company management if it is unable to propel the business

Go through the above mentioned risks in venture capital funding once again and see the requirements of your project before you start and make any decisions.