Understanding the right kind of investment support for your business can be a daunting task. With so many options available to founders one can easily become overwhelmed when trying to decide how best to raise capital for their business.
Today, we’ll cover two of the most common ways beginning entrepreneurs can secure the funding their business deserves.
In this post, we compare angel investors vs venture capital to help you decide which type of investment is right for you. We cover the main differences between angel investors and venture capitalists, including the amount of funding they provide, their level of involvement in the business, and their investment focus. We also discuss the key considerations to keep in mind when seeking funding from either type of investor.
What is an Angel investor?
Angel investors are individuals who invest in early-stage startups, often intending to help the business get off the ground.
Angel investors usually offer more favorable terms compared to other lenders because they often focus on the potential of the entrepreneur rather than the viability of the business itself. These investors normally focus on helping startups get established and may be less concerned with the potential profit they could receive from the business.
Angel investing is typically done by affluent, accredited investors, who provide capital to startup businesses in exchange for equity or convertible debt.
Some angel investors invest individually, while others use crowdfunding platforms or create angel investor networks to pool their capital together.
Angel Investors Pros and Cons
Angel investors are known for helping businesses that have yet to develop a product or enter a market. Turning to angels can be a phenomenal way for founders to secure funding who aren’t quite ready to pitch to large VC firms and who also don’t want to raise capital through debt.
One potential disadvantage of receiving angel investment is these investors usually require a significant amount of equity in exchange for their funding. This results in entrepreneurs having less control over the management and direction of their business, as well as reducing the potential reward if their business ever becomes successful.
What is a Venture Capitalist?
Venture capitalists (VC) are private equity investors that provide capital to startups and small businesses with high growth potential in exchange for an equity stake.
More specifically, venture capitalists usually exist as part of a VC firm, that uses other people’s money to fund high-growth, high-risk startups.
A common mistake is believing that venture capitalists provide funding to startups from the very beginning. Instead, they tend to focus on companies that have already developed a business plan and are ready to begin selling a product or expanding their business.
Venture Capitalist Pros and Cons
Familiarizing yourself with the advantages and disadvantages of venture capital is primary to any new investor. Venture capitalists have the ability to provide large sums of funding to promising businesses. For companies that require significant capital to fund further growth, venture capitalists offer a great way to raise capital efficiently. Additionally, this large amount of capital also doesn’t come with a repayment plan, meaning founders don’t have to worry about paying back the investment if their business doesn’t work out.
On top of providing capital, venture capital firms also work with the companies they invest in to help develop their business. This includes introducing founders to various business development opportunities, as well as providing guidance on how to scale operations cost-effectively.
A downside of seeking funding from venture capital investors is the possibility you don’t get along with your new business partners. Typically, VC firms will take an active role in growing your business, and at times, this can lead to disagreements surrounding important business decisions. Founders who are looking to maintain complete control of their company may wish to finance their business through other means.
Angel Investors vs Venture Capitalists (What are the Differences)
Angel investors and venture capitalists are two common sources of funding for startups. Yet there are stark differences between these two financing methods founders should know.
They differ in due diligence
Considering venture capitalists invest other people’s money and angel investors rely on their own funds to provide capital to businesses, it makes sense that VC firms conduct a higher level of due diligence than angels.
Some angel investors will do little to no due diligence on the businesses they invest in, mainly because these businesses don’t yet have a product to sell or financials to review. Rather, angels are investing more into the founders than the business itself, and therefore entrusting the founding team will use their capital responsibly.
On the other hand, venture capitalists have a legal obligation to properly vet investment opportunities, and therefore, conduct much more extensive due diligence. The expenses associated with this process will vary considerably, with more complex due diligence projects costing upwards of $100,000.
VC firms are more involved in the development of your business
While all angel investors provide entrepreneurs with capital, some may also introduce business owners to industry contacts, while other angels may not get involved in the operations or development of the company whatsoever.
Venture capitalists tend to be much more calculated in the companies they invest in and require potential investments to meet certain criteria regarding target market size, proposed competitive advantage, or experience from the management team. Once they have invested, they take an active role in helping to build successful companies, by providing strategic guidance and offering other resources as needed.
Angel investors tend to be more “hands-off” business partners, whereas VC firms take a much more active role in the direction a company takes.
Angel investors are individuals, whereas venture capitalists work for a company
Angel investors operate as individuals, who invest their own money and make their own decisions. These business angels don’t answer to senior management or have an obligation to invest their money in a particular way. Rather, they enjoy complete autonomy in what and how they invest their money.
Comparatively, venture capitalists can be defined as more professional investors who usually work for a VC firm that invests other people’s money. VC firms receive capital from corporations, foundations, pension funds, and individual investors who are relying on them to find investment opportunities in high-growth companies.
They invest different amounts
When considering seeking financial support from a venture capitalist or angel investor, it’s important to have a clear understanding of the amount of funding they may be able to provide. Individual angel investors typically invest between $25,000 and $100,000, though the amount can vary considerably.
When a group of angels invests together, they may average an investment of more than $1 million! Sometimes, however, angel investors (even when they pool their money) don’t have enough capital to support a fast-growing company.
In contrast, venture capitalists typically invest larger sums, with the average later-stage VC deal totaling $14 million in 2021.
Angel investors fund early-stage companies
Angel investors typically focus on providing funding to younger businesses, particularly for early-stage technical development and formulating go-to-market strategies. Their investment can be crucial for getting a company off the ground.
In contrast, venture capitalists may invest in both early-stage and more established companies, depending on the focus of the venture capital firm. They’re interested in startups that show strong potential for growth yet may also invest in businesses that have already shown early success.
How to Get Angel Investor Funding
When looking to secure capital from angel investors, founders should prepare similarly to how they would secure funding from a venture capitalist.
Prepare a business plan that outlines:
- Business development strategy
- How funding will be used
- Management team experience
- Market research
- Product or service value to customers
This will be critical to successfully obtaining angel investments. Simply put, angel investors will want to see you understand your target market and have a well-thought-out strategy regarding how you plan to grow your business.
How to Get Venture Capital Funding
The question: how to get venture capital funding is crucial to any invester. While angel investors and venture capitalists will expect similar documents and preparation from you, venture capital firms will expect just a little bit more.
More specifically, the process of securing venture capital funding will require formalized presentations, negotiations, and an extensive due diligence process.
Below is a high-level overview of the key steps involved when securing venture capital funding:
1.) Decide your goals
Be sure to understand where you see your company going and how you intend to get there. How much capital are you looking to raise? What level of ownership are you willing to give up?
These are important questions you must ask yourself before engaging with any venture capital firm.
2.) Prepare your presentation
Any venture capitalist will expect to see a well-prepared executive summary of your business, including a detailed business plan outlining your business model and strategy for growth, as well as a pitch deck you can use to present to potential VC investors.
3.) Prepare for due diligence
When venture capital firms like your pitch, they will then conduct an in-depth review of your company. Here they will vet your business and confirm the figures and stats, and check if the opportunity you presented to them is true. This process can take months to complete and founders should be prepared to provide financial projects, product details, and other information a VC firm may ask for.
Great news, a VC firm wants to invest!
Before accepting, be ready to refer to the numbers you decided upon in step 1, regarding how much money you’re asking for and what level of equity you’re willing to give up.
Be prepared and ready to negotiate the terms of your partnership.
5.) Close the deal
Finally, close the deal by reviewing the term sheet, getting legal advice if needed, and start putting that hard-earned capital to good use.
The type of investor you should target will depend on where you are in the development process and whether you need a seed round to get started or if you’re more established and able to handle the added responsibilities of working with a VC firm.
Ultimately, the decision will be based on a few key factors, including the level of traction your company has gained, whether it’s profitable, and the size of the potential market. It’s important to remember that not every idea or company needs VC backing – smaller companies can also be profitable and provide good returns for founding members.
Consider carefully what you’re trying to achieve and how you fit into the investing landscape to determine whether an angel investor or venture capitalist would be the best fit for your company.