Investors come in many forms, but the most common are angel investors and venture capitalists. Both offer different benefits and are suitable for different situations. Here you can determine which is right for your startup.
If your startup has decided to secure funding, you’re on the right track to growth. But what type of funding is right for your business? Do you want a bank loan that will require repayment, or do you want to bring in an investor who will own a percentage of your company? If the latter is your answer, knowing the difference between an angel investor and a venture capitalist can help you figure out which is a better fit for your startup.
1. How Much Money Do You Need?
The key to knowing which type of investor to start with is knowing how much money you want to ask for. If it is a relatively small amount, usually under $500,000, seek out an angel investor. Angels tend to want a higher percentage of your company -- averaging 20-25% -- so be prepared.
If you’re looking for millions of dollars at the outset, seek out a venture capitalist. They will ask for a specific return on their investment, as well as a short-term exit strategy, usually 5-7 years. Venture capitalists, also called VCs, may ask to take a seat on your Board of Directors.
2. Have You Generated any Revenue?
Investors want to know that your business is viable, and that your business can make money. But if you haven’t yet started generating revenues (maybe you’re in early stages with your startup), not to worry. Angel investors often work with companies that haven’t turned a profit. Angels will be looking for a solid business plan, excellent ideas and strong management.
On the other hand, if you’re asking for big bucks from a VC, you better have the numbers to prove you’re worth valuation. Venture capitalists exist to help businesses grow, not launch, so if you’re past the seed stage and are looking to expand into new product lines or hire more staff so you can take in more business, consider a VC investment.
3. Do You Want Advice?
For many startups, the biggest investor benefit (next to the funding) are the contacts that the investor provides and the experience s/he brings to the table. If you want an active mentor, an angel investor who has experience in your field may be able to help you move into stores you wouldn’t otherwise.
Before You Pitch
Whether you choose to work with an angel or a VC, do your homework before you set up a meeting to pitch your startup. First, read as much as you can about what investors look for in a company and make sure you meet as much of the criteria as possible. Then, work on your valuation model to make sure you know exactly what your company is worth. Valuation will include:
- Sales in the queue
- Patents and intellectual property
Research specific VC firms or investors whom you want to pitch (and you should pitch several to find the best deal and the best chance of securing funding) to understand what they want. Find investors with experience in your field.
Finally, use the Checklist for Venture Capitalist to understand the role that you both will play as partners in your business. It’s important to know that this individual will be working with you to help your company grow for several years, so knowing exactly how much control you will give up when working with an investor is key.
As you build contacts in your local startup community, ask for introductions to investors. Also look to see if your city offers an incubator program like YCombinator or Founder Institute, as many investors flock to these programs, knowing that graduates have the experience and know-how that they’re looking for in an investment.