For those new to entrepreneurship, it’s not uncommon to get venture capital and angel investments mixed up when considering funding options for your business. The reality, of course, is that these two types of investors do not finance businesses in the same way. Each investor offers businesses different amounts of capital, and even the kinds of companies they choose to invest in varies depending on the startup.
If your business is attracting the eye of venture capitalists and angel investors, here’s what you need to know about each investor before deciding which one is the right fit for your startup.
Venture capital
What kinds of businesses benefit from VC funds?
Venture capitalists keep an eagle eye out for companies that are early stage and high-risk. Think apps and software startups that are young and highly specialized. Other types of companies on the VC radar include businesses with strong management that show signs of steady growth in an emerging market and the potential to yield huge returns.
How much capital do venture capitalists offer?
Venture capitalists may invest millions into a startup. If you need a little less than that (say, $10 to $50 million) consider working with a micro VC instead of a traditional VC firm.
Do they receive anything in exchange for investment?
Yes! In exchange for funding, business owners provide venture capitalists with a stake in their startup. This stake is usually shares in the business. They may also receive an equity position, which gives the venture capitalist an active role in the company. A venture capitalist may have a seat on the board and even play a role in the startup’s hiring process.
How should you prep before working with a VC fund?
Prep your business plan and pitch to be as up-to-date as possible before meeting with a VC firm. Most venture capitalists are on the hunt for unicorns. If they’re interested in your startup, you need to bring it. Talk up what makes your business unique, its market and financial projections, and the ways it’s positioned to take off in the short and long-term.
Related: Is Venture Capital The Right Choice For Your Startup? Maybe. Here’s Why
Angel investments
What kinds of businesses benefit from angel investments?
Unlike venture capitalists that work with specific startups, angel investors work with all sorts of small businesses. Your business may be a few years old with a steady revenue stream and still in need of capital. If so, an angel investor can be of great help. These individuals may be doctors, lawyers, and even entrepreneurs. They take their existing wealth and invest it into businesses that need it.
How much capital do angel investors offer?
This is one of the greatest differences between a venture capitalist and an angel investor. Venture capitalists can invest millions into startups. Angel investors have a cap of $25,000 to $100,000 per company. Why are their investments so much smaller than venture capital? Because the money comes out of their own pockets — and generally, that means a little less than what entrepreneurs would receive from a VC fund.
Do they receive anything in exchange for investment?
Yes! Just like venture capitalists, angel investors also request a stake in the company. Again, this tends to be shares or an equity position.
How should you prep before working with an angel investor?
Angel investors are less likely to keep their ear to the ground on the startup scene than VC firms. You may need to introduce yourself and your business to an angel investor first. When making an introduction, be sure to share your business plan, elevator pitch and executive summary. This provides the angel investor with more information on your startup’s background and how the company plans to succeed over time. Angel investors will be much more comfortable about investing into a business that has an outlined track for success and one that shows the valuable role the angel investor may play in that success.
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Should I choose a venture capitalist or an angel investor?
Now that you know the difference between both types of investors, which one should you work with? Conduct a little extra due diligence before signing any contracts. Ask yourself how much capital your startup needs, and whether or not you’re OK with having other individuals involved at the decision-making level of your business.
You may also want to discuss any expectations that the investor has for your business before moving forward, too. Maybe you can meet them now, or maybe the timing isn’t right just yet to bring on an investor. By conducting your due diligence now, you’ll have a better understanding of what you and your startup need in the long run.
