Question

Can you tell us more about venture capital financing and corporate governance issues that a small business owner might encounter or are these only issues of "big business"?

Answer 1

Venture capital financing of small business also comes with its own challenges in corporate governance.

“Corporate governance means the way by which a company is governed. Corporate governance defines the system of rules, practices, processes that direct and manage an organization.”

The small business owner is always challenged with ways to fund his start-up and sometimes even to manage the working capital requirements. They find funding from bank inadequate and support from friends and relatives runs out in a short time. The small business looks towards venture capitalist to support and help grow their business.

The advantages of working with a venture capitalist are as follows:

• The venture capitalist can provide guidance and consultation in different areas of business.
• They support critical decision-making in human resources management and financial management.
• The venture capitalist can provide good support in legal, tax matters especially in the nascent stages when a business cannot afford the luxury of a tax consultant or financial advisors.
• The venture capitalist is normally well connected in business communities and their connections can help a startup business.

The key disadvantages are as follows:

1. Forced management changes: The small business will have to take on personnel in the team recommended and suggested by the Venture capital. These people are normally forced on the small business as experts in their fields to improve the business.
2. Equity stake will be reduced: The overall equity stake will reduce as their fund requirements are huge and soon they become minority stakeholders.
3. The decision making ability changes: Over and above the changes in the team and equity stake are the changes in decision-making ability. The small business owner needs to take approvals from a venture capitalist on capital spending, expansion, and human resource requirements.

1. Delay in funding of ideas: The flow of funds may be linked to many other criteria from the venture capitalist, for example, sharing some financial reports or meeting some milestones to get those funds.

Although venture capitalist is a source of funding and expanding your business it comes with controls that the venture capitalist will impose to protect his money.