Technology

Beware Of Predatory Venture Capitalists

Entrepreneurs eager to launch their startup should take advantage of today’s low interest rates to entice venture capitalists to fund their ideas with the current “cheap money.” High-net-worth investors are taking advantage of the current climate before interest rates climb, and your startup could reap the benefits of venture capitalist funding. Before accepting any offers, it is important to understand if this is the right financing strategy for your business.

Venture Capital Venture Capitalists
AnandKZ / Pixabay

Is Venture Capital the Best Option?

If you’re serious about launching your startup and getting your idea off the ground, then venture capital might be the boon your company needs to reach the next stage of its life. Talk to the leaders of other, similar startups that have recently obtained venture capitalist backing to gain an understanding of the process from a direct point-of-view. Also, local business organizations typically have resources to help a budding entrepreneur fund their dream. Double check the other available options before setting your sights on venture capital funding. Should you decide to pursue a venture capitalist to back your startup, conduct the necessary, extensive research to ensure success.

Research Potential Venture Capitalists

If venture capital is a healthy option for your business, you will want to begin researching potential investors. In the world of venture capital, less is more. Large, statistic packed presentations will bore potential candidates, and mass, impersonal emails will not stand out. Research local venture capitalists and create a targeted list of investors to pursue. The best way to increase your likelihood to receive venture capital funding – beyond the internal operations of your business – is to research the companies that individual venture capitalists have previously invested in. If they are investing in companies in your geographic location, industry, business stage and have no stake in your potential competition, then you are much more likely to capture their attention. Researching potential venture capitalists is a critical first step towards obtaining venture capital funding.

Predatory Venture Capitalists

While signing a piece of company ownership to a venture capitalist is normal, there is a fine line between helpful and harmful. Vulture capitalists swoop in on startups by rushing them into a funding agreement that leaves their company vulnerable. These investors often prey on young, excited entrepreneurs and take over the company completely. The best way to prevent losing total control of your company is during the negotiation phase and understanding competitive owner’s interest rates to protect the future and health of your startup. Prior to seeking venture capital funding, building your business to a level where your success is clear will make your company more attractive to venture capitalists. This also allows you to have choices, which can help you negotiate better terms, avoid losing control of your company and find the investor that best aligns with your goals.

Find the Right Investor

Seeking a venture capitalist is a complex process, and once you have found one, you should conduct more research to see if they are right for your company – after all, you are signing over a portion of your company. In addition to sacrificing ownership percentage, you’re also looking for a venture capitalist who will make a good business partner. At the end of the day, it is a beneficial, two-way relationship, and if the relationship fails, the company might share the same fate. However, the connection between you and the investor is not the only relationship you should have concerns about, as the venture capitalist’s connections will also have a profound impact on the growth and success of your business. They have the potential to bring a lot more to the table than money if they are integrated with the right members within your industry.

Capitalize on Venture Capitalists

To frame your startup in the most attractive format to capture the attention of a venture capitalist, be prepared to prove you have a competitive, unique product that fills a void in the marketplace. Venture Capitalists love to find small companies with strong management and large market potential. They want the opportunity to seize a portion of ownership share in the company. If you are able to prove to an investor that your startup is ready to jump to commercializing its innovation, then you are more likely to attract venture capitalist funding.

While current low interest rates are creating a hospitable environment for entrepreneurs to launch their startups, venture capital is not the perfect option for every startup. Many entrepreneurs ask how they can obtain venture capital funding rather than asking if it is right for their company. Even in this attractive climate, there are many factors to consider before seeking or accepting a new business partner. Your business may need the extra equity in order to reach the next stage of its life. However, conduct the necessary research beforehand, prepare the groundwork for the increase in funding and understand the contract to avoid losing control or harming the long-term health of your startup.

Mason Cole, co-founder of Cole Sadkin LLC.

Website: www.colesadkin.com

Mason Cole, the firm’s founding partner, focuses his practice on intellectual property. Whether you are looking to start a small entrepreneurial business or wanting to protect the next million-dollar idea, Mr. Cole specializes in guiding you from the initial incorporation or trademark to your exit strategy and every stage in between. Mr. Cole brings a certain sense of compassion and ingenuity to every situation and case. He builds a strong interest in helping you with your individual and business needs, and invests time in working together to reach a shared vision.

Mr. Cole has spoken at several events, such as the Central Lakeview Merchants Association on landlord-tenant issues, Loyola University on intellectual property and at DePaul University MBA on corporate formation. Furthermore, he remains actively involved in the Chicagoland community today through extensive networking, and is President of YPB within the Small Business Advocacy Council. Our firm is also on the board of the Small Business Advocacy Council.