We've said that venture capital is data driven and time consuming. We've said that having the right VC partner can be very valuable. Let's add to the list of things you should know: venture capital funding can be expensive.

The normal venture capital path is simple. A VC company is going to look at your risks, weigh them against your potential, offer you a sum of money, ask for a certain level of control, and cash out down the road somehow - leaving you with whatever's left. If you crash and burn, they eat their losses. If the VC people give you $5 million in exchange for a 30% stake in your company and five years down the road your ideas coupled with their management have created a company worth $90 million on an initial public offering, the VC firm is going to walk away with $27 million or your money.

Now figure out how much you would have paid in interest if you'd found a way to borrow that $5 million for five year at 10% or 15% interest. I guarantee you that repaying that loan would cost you less than $27 million.



Of course, as Amar Goel points out in his blog, the problem is finding someone who will loan you the $5 million at any interest rate for a high risk project. Maybe the venture capital route is one of the few choices you have.

Be prepared for the simple fact that it is an expensive choice.

Posted by: Greg Cruey    Source