Expert warning over venture capital risks

Academic argues bright lights of venture capital are blindsiding entrepreneurs

A London Business School academic has spoken about the dangers of fledgling businesses seeking money from venture capitalists too early.

John Mullins, Associate Professor of Management Practice in Marketing and Entrepreneurship, London Business School says that raising venture capital can be a full-time job in itself, meaning new business owners have less time to concentrate on fully developing their product or service.

Dr Mullins also says that venture capitalists will be aware of the risk involved in investing in an unproven business so will insist on potentially damaging clauses in any deal.

Speaking to The Telegraph, he said: "Raising capital often requires full-time concentration, but so does starting an entrepreneurial business. So if you are trying to do both of those two things, one will suffer."

Dr Mullins said that raising capital can act as a distraction and that time would be much better spent focusing on the business and finding out about the customer base.

Asking investors to back a business which is unproven both in terms of concept and sales is also a risky strategy, according to Dr Mullins.

"The terms and conditions attached to venture capital can be really onerous as investors seek to protect themselves from downside risk," he added. "They are going to be in the driving seat and will have de facto control of the business even though they may not own the majority of it."

Investors may have the right to fire you or to bring in new directors, according to Dr Mullins, who adds that it is much better practice to attempt to raise money after having proven that the business works.

Dr Mullins is the author of The Customer Funded Business published by Wiley, 1 September 2014.