Sources of Funding for Entrepreneurs

This assignment examines different sources of funding for entrepreneurs. It delves into traditional methods like bank loans and angel investors, as well as modern alternatives such as venture capital, corporate venture capital, and crowdfunding. The document analyzes the advantages and disadvantages of each funding option, helping entrepreneurs make informed decisions based on their specific business needs and goals.

Running Head: CRITICAL ANALYSIS OF VENTURE CAPITALISTS
CRITICAL EXAMINATION AND DISCUSSION OF THE USE OF VENTURE
CAPITALISTS
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CRITICAL ANALYSIS OF VENTURE CAPITALISTS
Table of Contents
Introduction...........................................................................................................................................3
Literature Review and Critical Examination..........................................................................................3
Conclusion and Recommendations........................................................................................................8
References...........................................................................................................................................10

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CRITICAL ANALYSIS OF VENTURE CAPITALISTS
CRITICAL EXAMINATION AND DISCUSSION OF THE USE OF VENTURE
CAPITALISTS
Introduction
The new innovative companies also known as start-up companies require investments from
investors. Such new ventures are risky but they have potential for high growth, and the
investment required by such companies is called venture capital, and the investors are
referred as venture capitalist. The most successful example of success of venture capitalist
comes from Silicon Valley. Venture capitals are provided by outside investors, and the
investment is done in exchange of equity stake and not as loan (Deeb, 2016). Companies
which require large capital up-front consider venture capital as the most suitable option for
investment. The paper critically discuses the concept of venture capital, and provides an
overview of the different business investment forms which are suitable for start up
enterprises. The paper also discusses the pros and cons of venture capitalist organizations,
and highlights the major issues faced while negotiating with venture capitalists. The paper
considers a specific start-up idea, and uses it for discussion and provides recommendations
for the start-up that whether or not to use venture capital as a source of business finance.
Literature Review and Critical Examination
Need for Venture Capital

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CRITICAL ANALYSIS OF VENTURE CAPITALISTS
Venture Capital is for ideas; it is majorly made for the ideas which can earn more than 3x
returns. The ideas or ventures which can bring in millions of business are the most interesting
and attractive venture capital investments. New ventures that carry lot of risk need venture
capital (Zider, 1998). Venture capital is not a long-term investment, the basic idea behind
venture capital investment is to invest money to build the infrastructure and improve the
balance sheet until the enterprise attains expected size so as to sell it to a bigger corporation
or so as to get the benefits by enabling the institutional public-equity markets to enter and
offer liquidity (Zider, 1998). Venture capitals are preferred because of their structure and
rules of the capital market. Mostly people with new business idea who can’t raise big funds
through other methods like bank loans and equity consider venture capital as the most viable
option. Banks charge higher interest rates, and banks offer loan mostly against hard assets
which secure the debt, but mostly the information technology start-up have very less hard
assets, and hence, venture capital seems to be the best option. Additionally, bank loans and
public equity are tied with regulations and most start-up ventures don’t pass those
regulations. Venture capital is the most attractive investment option in case of start-ups
(Harrach, 2017).
Innovative Start-up
An innovative start-up which will be considered for venture capital funding is ‘Rent-us’
which sells spaces, which can be rented. The company also transforms the whole space as per
the requirement of the client, and the transformation fee needs to be paid in instalments.
Thus, the clients can use the space and pay only rent, and the transformation fee is paid in
instalments. For example if a family would like to convert the room into a studio apartment,
they may ask ‘Rent-us’ to transform the space into a studio apartment and that particular fee
will be paid in instalments. It is an online platform, and has created their app. The application

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CRITICAL ANALYSIS OF VENTURE CAPITALISTS
also offers attractive discounts to its clients for reference, and full payments of transformation
services.
Different Investment Options for Start-up Enterprises
A start-up can choose from different investment options that are available, like bank loans,
bootstrapping, family and friends, seed-funding, Angels, Incubators, small business grants
and bank loans. (Rao, 2013). Bootstrapping refers to self-funding the start-up, and its biggest
advantage is that the entrepreneurs will take the full control of the business. However, if the
business fails, all the savings will be lost (Zwilling, 2010).
Entrepreneurs can also borrow funds from family and friends and close business associates.
However, the entrepreneur may lack suggestions of experienced investors. Similarly,
entrepreneurs can also get capital from crowd-funding (Anderson, 2016). Entrepreneurs can
use a crowd-funding website, and borrow small capitals from many people. However, the
entrepreneurs should be ready to explain their plan to a number of investors which requires
time.
Angel investors are also an important financing method, where investors like wealthy
individuals and other retired people who invest in the start-up to gain a equity. There are
some angel investment institutions and seed funding organizations which provide funds to
attractive start-ups (Platt, 2017).
Venture capital as discussed is the most attractive mode of business financing for start-up
entrepreneurs. Venture capitalists invest money in the business in exchange of equity until the
business goes public or is acquired by bigger organisation (Harrach, 2017). However, the
most important asset for acquiring venture capital is better business plan which provides
higher returns.

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CRITICAL ANALYSIS OF VENTURE CAPITALISTS
Bank loans are among the most popular business financing sources for start-ups, however, the
interest rates and various regulations and requirements make them difficult to acquire, and the
start-up idea needs to get qualified as per the norms of the banks.
Small business grant is also an important financial sourcing option for start-up enterprises,
and it involves getting funding and grants from government institutions (Platt, 2017).
However, they follow strict qualification criteria, and the start-ups must fulfil the eligibility
requirements.
Advantages and Disadvantages of Venture Capital
Venture Capital us the most attractive source of business finance for start-up entrepreneurs,
however, venture capital has its advantages and disadvantages which serve as the deciding
factor for whether or not seeking venture capital funding.
Advantages
Expertise and guidance is the major advantage of venture capital. Venture capitalists are
picky and experienced individuals. They have the eye for perfection and detailing and quicky
calculate the returns and hence, they serve as the most valuable source of guidance and
consultation (Kunigis, 2016). They offer management expertise and decisions making
assistance along with financial management and human resources.
Moreover, the venture capital institutions provide support in other matters like legal issues,
taxation, government regulations and any other business related and also personal issues.
Venture capital provides support at the initial as well as the growth stage and plays a major
role in the growth of the company. The venture capital institution guides the entrepreneurs in
making better decisions which lead to huge returns.

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CRITICAL ANALYSIS OF VENTURE CAPITALISTS
Additionally, the venture capitalist individuals are well connected with the business
community and can provide required support and guidance in making better decisions.
Moreover, the connections can benefit the enterprise.
Disadvantages
A major disadvantage of venture capital financing is loss of control over the entiy. The
entrepreneur loses the control, and their share and stake in the company will decide the future
directions of the enterprise (Hickey, 2013). They are aggressive investors who would be
interested only in huge returns and the entrepreneur solely cannot take the business decisions
because of the holdings of the venture capital institution.
In some cases the ownership stake of the venture capital may increase than 50% and the
entrepreneur may lose total management control. In case of minority status, the entrepreneur
may even lose the ownership status (Kunigis, 2016).
Negotiations with Venture Capitalists
The entrepreneurs who look for venture capital must be aware of the pros and cons of venture
capital, and must take a thoughtful decision. The start-up is always a risk, and so do capital
funding, but the entrepreneur can negotiate with the venture capitalists and enter into a
profitable and healthy venture (Sinervo & Malinen, 2011). A major issue faced while
negotiation is the valuation, which refers to the price of the company in which the investment
is done, and valuation will determine the percent of the enterprise the venture capitalist will
hold (Hoffman & Blakey, 1997). Timing is also an important negotiating factor, some
investors might approve huge capital but the capital will be paid in instalments and that too
when the company achieves prescribed milestones.

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CRITICAL ANALYSIS OF VENTURE CAPITALISTS
Another major negotiating issue is that of proprietary rights, and regarding the ownership of
the intellectual rights if any (Thangavelu, 2015). Moreover, the negotiations will also revolve
around the ownership of any new inventions of the company. The venture capitalists are very
much focused about the exit strategy and the hence, they will be very stringent while
negotiating about the exit strategy and sale of the company. Venture capitalists also negotiate
on the issue of lock-up rights (Sinervo & Malinen, 2011). They often demand lock-up period,
where the investors will get the exclusive rights. The venture capitalists may even negotiate
regarding the changes in the management team. All the negotiation issues are equally critical,
and entrepreneurs must consider them while negotiating with the venture capitalists.
Critical Evaluation of the Statement
The literature review provides an overview of the venture capital financing and highlights the
major advantages and disadvantages of venture capital funding. The negotiation tactics, the
strategies and funding policies and management control. The venture capitalists are very vary
about the investments and are often concerned about the returns and will ensure that they get
high returns and appropriate stake in the company. In the context of the various
environmental issues it is evident that the venture capital funding option should be critically
assessed. In case of ‘Rent-us’ also, venture capital funding can be considered once the
company gets started and increases its market. The market for ‘Rent-us’ is huge and has the
potential of earning high returns. However, before acquiring venture capital a critical
assessment should be done to assess the viability of venture capital funding.
Conclusion and Recommendations
Every new start-up is a risky business, and from the assessment of venture capital concept it
is evident that venture capital funding is equally risky (Zider, 1998). Although, venture
capital funding is the most attractive business financing resources, but the venture capitalists

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CRITICAL ANALYSIS OF VENTURE CAPITALISTS
are too choosy, and the very nature of the venture capitalists requires the entrepreneurs to
take a thoughtful decisions before receiving venture capitals.
The venture capitalists are picky, and choose the most attractive option which helps them
achieve higher returns. There are various ownership, management and valuation issues which
should be considered before obtaining venture capital. Although, venture capitalists are the
experts and provide their valuable support and advice to the entrepreneurs, but venture capital
funding may even cost the entrepreneurs their ownership (Zider, 1998). Hence, it is important
to critically assess the environment and negotiate with the venture capitalists so as to enter
into a healthy venture.
‘Rent-us’ is a web-based and mobile application based start-up enterprise which provides
opportunities to people to rent and transform their rented spaces as per their convenience,
with minimum investments. The market for ‘Rent-us’ is huge, since there are many
customers who require spaces on rent and many who want people to rent their spaces, and
this application ends their search and also gives an added advantage and great discounts. The
company will require venture capital funding in its growth stage. However, ‘Rent us’ should
assess the environment and negotiate with the venture capitalists such that the terms match
with the vision and mission of the enterprise.

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References
Anderson, J., 2016. Chron. [Online] Available at: http://smallbusiness.chron.com/various-
sources-finance-available-entrepreneur-2294.html [Accessed 16 August 2017].
Deeb, G., 2016. Forbes. [Online] Available at:
https://www.forbes.com/sites/georgedeeb/2016/07/18/what-exactly-is-venture-capital/
#7745e4d62501 [Accessed 16 August 2017].
Harrach, R., 2017. Forbes. [Online] Available at:
https://www.forbes.com/sites/allbusiness/2017/02/25/startups-seeking-funding-should-
consider-corporate-venture-capital-arms/#21ebc1dc759f [Accessed 16 August 2017].
Hickey, J., 2013. Bank of America. [Online] Available at:
https://smallbusinessonlinecommunity.bankofamerica.com/community/managing-your-
finances/credit-lending/blog/2013/10/24/venture-capital-funding-understanding-its-
advantages-and-disadvantages [Accessed 16 August 2017].
Hoffman, H. & Blakey, J., 1997. You Can Negotiate With Venture Capitalists. Harvard
Business Review.
Kunigis, A., 2016. The Hartford. [Online] Available at:
https://www.thehartford.com/business-playbook/in-depth/venture-capital [Accessed 16
August 2017].

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Platt, R., 2017. Startups. [Online] Available at: http://startups.co.uk/business-finance-6-
sources-of-finance-for-a-business/ [Accessed 16 August 2017].
Rao, D., 2013. Forbes. [Online] (web) Available at:
https://www.forbes.com/sites/dileeprao/2013/07/22/why-99-95-of-entrepreneurs-should-stop-
wasting-time-seeking-venture-capital/#1727532546eb [Accessed 16 August 2017].
Sinervo, P. & Malinen, P., 2011. Business Plan and Negotiations: Venture Capitalists'
Assessment of Weaknesses and Remedies. Research Gate Publications.
Thangavelu, P., 2015. Investopedia. [Online] Available at:
http://www.investopedia.com/articles/personal-finance/102815/does-your-startup-need-
venture-capital-money.asp [Accessed 16 August 2017].
Zider, B., 1998. How Venture Capital Works. Harvard Business Review, November.
Zwilling, M., 2010. Forbes. [Online] Available at:
https://www.forbes.com/2010/02/12/funding-for-startups-entrepreneurs-finance-zwilling.html
[Accessed 16 August 2017].