Capital-as-a-service (CaaS) refers to venture capital firms investing large amounts of money in a business to provide them with funding to enhance the target company. The venture capital (VC) firm buys into the target company, improves it, or waits for the company to grow. After the growth of the company, it sells its stake for a profit.
In CaaS, venture capital firms usually invest smaller amounts in start-up companies. If the companies succeed, the return is likely to be very high. CaaS can also include managerial and technical expertise. Most venture capitals come from a group of wealthy investors, investment banks, and other financial institutions that pool such investments or partnerships.
CaaS is a form of raising capital. And it is popular among new companies or ventures with limited operating history. Such companies cannot raise funds by issuing debt. So, CaaS can be very helpful.
In CaaS, venture capitalists look for a strong management team and a large potential market. Also, they look for a unique product or service with a strong competitive advantage. Similarly, for CaaS, capitalists look for opportunities in industries that they are familiar with. Also, they seek for a chance to own a large percentage of the company. This way, they can influence its direction.
ADVANTAGES OF CAPITAL-AS-A-SERVICE
- Start-ups can grow faster.
Rather than bootstrapping with high risks, with Capital-as-a-service, you can get that money. With the money, you can grow fast. You can do all the different things you would not do if you were bootstrapping. Bootstrapping refers to using money that you are generating from sales to continue pushing the business. There is no guarantee in bootstrapping that you will succeed. Also, it is a slow process. So, CaaS is quick and gives the result faster. This way, you can make the necessary changes on time.
- Buying up the market
Another advantage of Capital-as-a-service is being able to buy the market. For instance, you are operating a platform or a marketplace. There you have the supply and the demand. Then, you can go out and spend a lot on marketing. Also, you can get mindshare and market share from the other competitors.
- Attract great talent
With CaaS, you can attract and potentially retain great talent. When you can get venture capital money, you are sending a signal to the market. It means that you are in a position of strength and that things are working out. And that’s why people think that sophisticated investors are backing your business.
- Great network
Top-tier venture capital firms have platforms. Then they plant those platforms into your business. It helps you to speed things up in a way that you did not know. Imagine you need a CMO or a CFO. Those firms can introduce you to the right candidates. So, CaaS also helps in building networks.
DRAWBACKS OF CAPITAL-AS-A-SERVICE
Distraction can be a huge disadvantage when you are raising money. Investors expect you to continue to execute and to have good traction. But when you are putting your attention away on fundraising, it becomes hard to focus on the business. Essentially, you are going to get your eyes off the ball. And, you will put them on trying to get the money to get to the next level.
To tackle this con, you can take some steps like creating a CRM. Also, you can make strategies on how you can follow up with people and get them excited. In this way, there is a chance to balance the distraction.
- Committing to an exit
The minute you are taking the CaaS in, you are making the VC firms a promise. The promise is that you will give them returns either in the form of an acquisition or doing an IPO. You tell them that you can grow fast and then one day pay them back. When a venture capital firm invests in your business, they expect higher returns.
- Losing control
The downside for entrepreneurs in CaaS is that venture capitalists usually get a say in company decisions. Rather than having 100 percent of your business, after CaaS, you may have to give away your equity and seats on board. Thus, the VC firms can make votes and have a say on the execution. The more that you raise, the less control you have. You hold less equity, and eventually, the VC firms can kick you out of the business if you do not perform well.
- Attracting wrong people
You should not only look at the firm that you are working with. You should be more careful about the partner that you are working with. If you are attracting the wrong candidate to sit on your board or make an investment in your business, it creates problems.
- They can kick you out of the company
- They can destroy financial rounds
- They can damage potential acquisitions
Building and scaling a business is not a straight line. There are many ups and downs. And whenever your business is on the downs, make sure that the investor will help you with the execution.