7 Pros and Cons of venture capital for digital health startup

Pros and Cons of venture capital for digital health startup

Venture capital as a financial option for your digital health startup

Undoubtedly, the biggest hurdle lies in the path between a unique idea, and a profitable business is cash. Digital tech entrepreneurs spend a substantial amount of the time in searching for a best suitable option for financing their startups. Every business needs investment; some might need it to move their idea off the ground while others might need it during their expansion.

The best investment option depends on the business, its track record, and growth policies. Some firms stay self-funded forever, while others want the capital investment and expertise from outsiders. Getting the right investment, in the right amounts at the right time can often make the difference between a startup’s success and failure.

Venture capital is one of the feasible financing options for a startup or an ongoing business. VCs usually invest in companies with high growth business model and high tech industries such as biotechnology, IT, etc. In return for their investment, a VC firm usually gets a significant portion of company equity, along with control over business decisions.

Venture capitalists tend to make much larger investments than other forms of funding. VCs might work with the business for five to seven years before selling their shares.

Approximately 70% of all VC funding is directed in five sectors:

  1. Software
  2. Biotechnology
  3. Medical Devices
  4. Telecommunications
  5. Semiconductors
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Let’s look at the pros and cons of venture capital for digital health startup.

Pros Cons
1. Cash: VCs put some serious money to help your business. This kind of money can be far greater than what you can get via debt capital or other financing options. Such companies have portfolios that range into the billions of dollars. What’s more, it is your money, and unlike a bank loan, you do not have to reimburse the investment capital. The average investment could be between $500,000 and $5 million. 1. Control: You may lose control over company’s decisions. VC investment includes equity in your business. Subject to the amount of equity granted to the VC, the investors may gain the right to make governing decisions for the company. Hence, you need to think before accepting the offer of $500,000 if it’s worth 60% of your start-up.
2. It’s not a loan: It may be more convenient and immediate if you walk down to your local bank requesting a business loan, but it’s possible that your nearest branch cannot lend you the volume of money you need to start your business or to expand it. Moreover, if your bank loan goes into default, it’s the start of a ticking time before declaring the bankruptcy. Venture capitalist dollars have no repay schedule and are more convenient. 2. Profit share: Given that your business succeeds, you will get a sharp cut in the percentage of the profits your start-up will keep to itself. Hence before taking higher investments from a VC firm, consider if your business will make more or fewer earnings when all parties have paid their share. You get higher funding, but you have to share the profit with VCs.
3. Business expertise: VCs are experienced entrepreneurs and make calculated investments. You get proper advice from people who’ve built and sold successful companies in the past, as well as active mentorship around how to overcome challenges and disappointments. VCs have power in ensuring your start-up flourishes (wins). 3. Pressure: VCs want you to succeed so that they win big. They have high hopes for your business (product) and the money they’ve devoted to it. VC funding isn’t loved for money; it’s all business.

According to market experts, anticipated rates of return can be as high as 50% annually.

4. Valuable connections: Venture capitalists naturally well linked with the business community. You get remarkable benefits while working with them, which help you numerous aspects of your start-up.

For instance, a tech-minded VC from Bangalore or Silicon Valley will have an extensive network. Those contacts can turn into investors.

Down the line, one of them may even be a buyer of the start-up.

4. Struggle and patience: As an owner of the start-up, you’ll have to prepare a comprehensive business plan with financial estimates, powerpoint presentations and even seek third-party advice to make your proposal more convincing. Once you have prepared it, you have to find the right venture capitalist that invests in your sector.

You will also have to give them the time to decide if they want to invest in your start-up. This time could be anything from six months to a year. The owners who don’t have the patience may find this wait agonizingly frustrating.

5. Additional resources: VC firm can also provide support in the critical areas of legal, tax and consulting. These are all but crucial stages in the growth of an early stage startup. 5. Minority ownership status: Depending on the size of VC firm’s stake in your start-up, you could lose management control. Usually, the stake is more than 50%.

So basically you have given the ownership of your start-up.

6. Support to compete: Typically, high tech startups require substantial capital to quickly scale to the point where they can enter and compete in the market. VC firms provide you significant support to compete in the challenging market. 6. Misaligned goals and priorities: Typically, VC firms do not want what you believe is best for your business in the long run. Your start-up may not be ready to grow as quickly or in the same direction as your investors demand. If your business model is genuinely outstanding, you may be needlessly sacrificing a significant share of future profits by using VC funding at start-up.
7. Exits :

VCs facilitate an exit strategy that satisfies both parties.

It involves terms and conditions in case of any liquidation or closure of start-ups.

7. Managerial distraction: The company’s daily operations could suffer when a manager’s attention is distracted by an intrusion of outside investors. It is simply because your ideas may not match with their assessments and thoughts.

Apart from above advantages VCs also assists in case of future alliances and mentoring.

Image credit: www.istockphoto.com

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