Venture capital or VC investors can go ahead with adopting a wide number of strategies towards strengthening the startup investments amidst strong competition out of cashed-up corporates. By the innate nature, venture capital investments tend to be risky. Unsecured loans offered to businesses and startup companies that are not able to receive conventional loans are known as venture capital. To ensure ample success, it is important to understand venture capitalist vs. private equity.
Venture capitalists are also known as angel investors. They offer access to necessary funding in return for possessing a part of the organization as well as its future profits. Competing with highly established multinational organizations can be overwhelming for most startup organizations -especially when they are competing against major corporate giants and their unmatched weapon -cash. Larger organizations are currently sitting on record-level cash stockpiles.
What are the Common Risks Venture Capital Investments Might Face?
There are several reasons why corporates hoard cash. Cash for these mega companies can help these market incumbents in financing the respective strategic responses. Moreover, incumbents can also go ahead with defending the market position by leveraging the competitive pressure on early-stage organizations and startups -leading them to fail eventually.
Some of the potential risks that startups might face from the industry giants on venture capital funding are:
- Returns and Risks
The higher will be the risk for a particular investment, the higher will be the potential returns. If you wish to ensure making a higher percentage capital gain or rate than others, you are expected to consider taking on more risks. This is why bonds of organizations with poor credit ratings tend to pay higher rates of interest. Eventually, the company might fail. Therefore, the bonds will become worthless.
A proper, steady investment in a blue-chip stock conventionally used to yield reduced returns in comparison to the stocks of large-scale enterprises or successful organizations. If you wish to invest in some joint venture, you should aim at analyzing the existing risks in the process. In case the risks appear higher, you can inquire about a guarantee for ensuring higher returns by obtaining improved percentage of profits for compensating the risk you are undertaking.
- Risks Related to Value
When a particular investment opportunity appears to depict a higher risk in comparison to other opportunities, the overall value might eventually fail. It is because the investors want to be compensated for taking up extra risks. If they will go ahead with putting the money in the form of a safe investment at the given price, they will not consider the risky investment.
However, if the investors will receive access to some discount, they might think of putting on their money to work in the given opportunity. For instance, when you own a startup business that has been considered as a failure by the bank, it might still think of providing a smaller amount of money as the loan in comparison to that of a large-scale corporation. It is because your company has less value.
- Balancing Investments
For your entire portfolio, you are not expected to take up ample risks. Rather, you can consider spreading the overall risk by putting the existing amount of money to work in a moderate, safe, and risky investment scenario. The percentages can be decided by you. At the same time, you can also think of customizing the available investments to the respective risk tolerance.
The given approach of balancing investments wisely will offer you the chance to ensure exceptional gains on high-risk investments. At the same time, it also helps in keeping a major portion in safer forms of investments for paying a lower return. In case your risky investment will fail, you will still have access to some funds to be used for recovery.
It is important to consider the overall importance of patience for VC investors while financing startups and facing competitive threats by large-scale, cashed-up business ventures. Patient financing will help in contributing to the overall growth and entry of innovative startups.
In case you think that VC funding is not the right fit for your business, you can think of choosing an alternative funding method known as revenue-based financing to offer ample support to businesses of all scales and sizes.