Ask These 5 Questions Before You Take Venture Money

Posted December 14, 2015

By Janine Popick

As a business owner, you may soon face a difficult decision: does it make sense for you to accept venture capital? While this may be the dream for some small business entrepreneurs (think Shark Tank), others are hesitant to forge this type of investor relationship.

Whether you're all-for venture capital (VC) investment, entirely against it, or somewhere in between; keeping an open mind lets you compare your options and make a confident decision. Before you take another step, get clear about whether venture capital makes sense for your small business by asking yourself the following questions.

5 Essential Venture Capital Questions for Entrepreneurs

1. Are you okay with diluting your share of the business?

If you take VC money, this is inevitable. You must be OK with the idea of giving a little to get a lot. Any venture capitalist who gives you money will want your business to grow big and scale and, in exchange, you get a smaller piece of a bigger pie.

I'm sure that when Mark Zuckerberg took in $12.7 million from Accel partners, he understood that giving them a 15 percent stake in the company was a wise choice. Obviously he knew it would be a very big company and even though his ownership would be diluted, it didn't really matter—as his pledge to give away 99 percent of his fortune shows.

how to decide if venture capital funds are right for your small business

2. Will you get along with your investors?

Don't let anybody tell you this doesn't matter. If you don't see eye-to-eye from day one, the relationship is doomed from the start. Be sure to discuss every aspect of your business, your vision, and the industry. It's never a bad idea to meet with potential investors multiple times, in both personal and professional settings, to ensure you're a good match.

If a disagreement arises, it doesn't signify the end of the relationship. However, it does call for immediate action. Letting disagreements fester only s things worse. John Linkner of Forbes provides this advice on what to do if you disagree with an investor.

3. Do you know the value of your company?

Review your competition, study your growth and revenue, and come up with an idea of what your company is worth. Just as important, make sure you can back up your numbers. Potential investors won't shy away from setting a lower valuation, so that they can own more of your business.

It's not always easy to put a value on your company, but online worksheets can help. Visit Entrepreneurship.org and TD Bank for guidance.

4. Can the investor do more than inject money into your company?

Money, money, money: if this is the only thing on your mind, you might align yourself with the wrong investor. Choose an investor who will back you financially, while also opening industry doors.

For example, Mark Cuban may be the perfect fit for a mobile app company, because technology is his primary area of expertise. Conversely, he's not likely to be the best partner if you're scaling a clothing company. Daymond John might be a better , since he runs a very successful fashion brand.

5. Do you have a plan for spending the money?

If you don't, you won't find many (if any) investors willing to join forces. You must have a clear understanding of what your business is worth, and what you will do with the money if an investor agrees to your terms.

Do you need the cash to build-out an experienced sales team? Will you develop a new product? Or will you use it to fill recent orders? Raise money to help your business grow, not just to survive.

Bonus Tip: Be Honest with Yourself

From your prospective, your company is as good as it gets. You're on your way to the top and nothing will stop you. Confidence is a good thing, but don't let it cloud your judgment. It's important to be honest with yourself, especially when it comes to taking any type of investment. If you don't have a clear-eyed view of your business, you may be surprised at what potential investors tell you.

At my startup, we decided to go the VC route because the answers to all of these questions pointed us in that direction. So far so good; we'll see what happens!

If you have your sights set on taking VC money in the near future, ask and answer these five questions. The information you reveal in the process will help you make tough decisions regarding investors and your business in general.

Founder and former CEO of VerticalResponse, Janine Popick is currently a co-founder and CMO of Dasheroo. Writing on topics related to marketing, small business, and entrepreneurship, her work has been featured in USA Today, TIME, Forbes, Small Business Computing, Businessweek, Huffington Post, TechCrunch and Social Media Today.

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!

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