So your startup is thriving and bursting at the seams. Congrats. You’ve decided you’re ready to seek funding. While this article certainly won’t tell you everything you need to know about funding, it’ll teach you the differences between angel investors and venture capitalists. It’s up to you to decide which is right for you.
Angel investors are private individuals looking for a strong, high growth investment. They want a better return than they’d get in a normal investment, so expect them to take 5-25% stake in your company. Funding varies, but tends to be on the smaller side.
Pros: Angels are often entrepreneurs interested in helping you get somewhere with your business. They can be great mentors as they’ve got the experience you need to succeed. If you want some advice, they’re ideal for that. And angel investors usually have great contacts, which can also be a boon for your startup. If your startup is still in the development phase (no product yet), angels may be more attracted to your business than VCs. Business deals tend to be more negotiable with angel investors.
Cons: If you’re looking for copious amounts of funding, angels aren’t for you. They tend to invest smaller sums than VCs. They may want a bigger ROI at the exit point than you are willing to give, and they may want a sizeable part of your company’s shares. If you’ve got a control freak for an angel, you may get irritated at how involved he wants to be in daily operations.
Venture Capitalists 101
Venture capitalists essentially buy part of your startup. They set terms to exit, usually in 5 to 7 years, with a specific return on their investment. There are three parts to early stage VC investment: seed financing (startup is not much more than an idea), startup financing (business is less than a year old) and first stage financing (ready to expand). Usually a VC will take a seat on your Board.
Venture capitalists can give your business a bigger injection of cash, so if you’re at the point where you can’t do more work without a bigger staff or more equipment, and you require several million to do so, VC is ideal. VCs tend to come from firms, so you have the benefit of being able to work with multiple people in a targeted industry. They’ve got the expertise to help you grow.
VCs can be slow to respond to your pitch. If you’re looking for fast cash, venture capital may take longer than you have. You’ll have to be extremely diligent in putting together your business plan and investor deck, and be prepared to answer any question imaginable when pitching a VC. They want to be sure that you’re serious about your startup.
So which one is right for you? Have you received funding? Share your tips with us in the comment section!