Why Venture Cap can be a Venture Trap

In some ways it’s even easier to launch a business from scratch today than it was ten years ago. The figures back up this fact: about 17% of all businesses now worth more than $1 million were launched with less than $5,000, according to Wachovia (NYSE: WB), America’s fourth largest bank by assets.

Still, your savings, credit cards, and loans and investments from family and friends can take you only so far. For your company to survive and prosper, you will need additional capital at some point.

Despite the lower cost of startups today, it’s still a particularly tough market for new funding, especially for small, new, or unusual businesses. "Today, even veteran CEOs are having a hard time raising funds, and what money they do raise comes with a lot of strings attached," said Jill Andresky Fraser, finance editor of Inc. magazine.

SBA study numbers indicate that more than half (56,000) of the 100,000 small businesses requiring equity capital to execute their business plans are unable to raise what they need through traditional approaches and private sources. And a full-scale, national-level, Independent Public Offering (IPO) is too lengthy and costly for most small businesses, assuming they can even meet all the requirements.

So what's the answer? Many small businesses consider venture capital. However, venture capitalists have, for the most part, vacated the $500,000 to $5 million-investment range. This makes small, new, inexperienced companies seeking funding especially willing to "do whatever it takes" to get the money, and thus especially vulnerable to the problems, shortcomings, and defects of this kind of financing, not to mention its abuses.

For a small number of companies who are at exactly the right time in their growth cycle and in their markets, venture capital can make a significant, positive difference. Most companies, though, can burn through a lot of time and effort looking for venture capital. If venture capital is available, it takes even more time to reach an agreement. Finally, most of those that succeed in acquiring this kind of cash end up trading away more control of their businesses than they should.

Looking at all the options

It makes sense to consider all the possibilities for new capital, and few decisions are more important than those that can affect the growth, expansion, ownership, and even the survival of the business. So when you put the word out that you’re looking for money, you may find (or be approached by) venture capitalists willing to buy in. They'll be happy to tell you stories about companies who rocketed to success with VC funding, companies that are now on the national exchanges because they received cash at the right time. The problem is that those successes are a vanishingly small percentage of the companies that seek VC capital. Over 99% of all companies that seek VC...

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