If you’re seeking funding for your startup, it’s important to know what you’d get and what you’d give up with both angel investors and venture capitalists before you make your decision.
If you’ve decided to seek an investor for your startup company, there are a few things you need to know about angel investors versus VCs, as each have different characteristics and requirements for their equity.
What Angels Are Best For
While money from an angel may seem like a gift from heaven, know that an angel investor will have some expectations of you. First of all, angels tend to deal in smaller investments, averaging $500,000, but often less, and rarely more. If you just need a small injection of cash flow, an angel may be a better fit than a venture capitalist.
The amount of equity an angel will request varies, from 5% up to 25%, so be prepared to negotiate on that point: they will always want more than you are willing to take. Compromises are possible.
Angels are typically private investors who act on their own, but occasionally they work together in angel investor groups. The more angels that are involved in your investment, the more voices and opinions you will have to listen to when it comes to running your business. On the television show Shark Tank, the angels very often combine their offers to share the investment and the risk with one another.
Benefits to Working with Angels
Oftentimes, angel investors have launched and successfully sold a business in your industry, so they’re good contacts to have. They may be able to provide valuable insight that can help you make smarter business decisions and grow your startup. Angels can serve as mentors, which often is more valuable than the money they provide.
If you don’t yet have revenue, angel investors will be more likely to invest in you than VCs, who want to see the bottom line. Angels are willing to help you grow and start making profit that they can share in.
Downsides to Angels
Not everyone likes having someone else tell them how to run their business, so if the idea of a mentor isn’t appealing to you, working with an angel may be difficult. And if you need a large cash injection, an angel probably won’t be able to provide it.
Working With Venture Capitalists
If an angel is a mentor, a venture capitalist is a silent (sometimes) business partner. He will set a date to exit with his equity, usually 5 to 7 years. There are three stages to VC funding, based on where your business is in its growth:
- Seed financing - the idea phase
- Startup financing - before the 1st anniversary
- First stage financing - time for expansion
It’s typical that a VC will want a place on your Board, which can be a good thing, as he should have the contacts to help you grow your startup, and his input is valuable.
Pros to VCs
Venture capitalists outlay larger investments than angels, so if you are looking for a sizeable piece of funding to really launch your business, VCs are the ones to turn to. Most venture capitalists work at VC firms, which gives you access to multiple people with experience and contacts in your field.
Cons to VCs
It’s notoriously difficult to get a VC to latch onto your business idea, or even get them to take a meeting with you if they haven’t already heard of you. The funding process can take quite a bit of time with you going door to door seeking funding, and the response time may be more than what you’ve got. The key is to be a part of your city’s startup and VC scene so you can have casual conversations with investors over cocktails, which can lead to face time at their offices later.
Which Will Work?
Only you know how much equity and say in your company you are willing to give up. Do your homework and research each investor and VC firm you speak with ahead of time so that you know what types of companies they have funded. If the firm has funded your competitor, this is important to know, so that you can understand how they will support you if they are also trying to increase their return with someone else in your field.
Focus on creating a stellar investor deck so that it’s simple to explain what your startup does. Have plenty of backup research, as investors from either camp will have plenty of questions. Before they give you their money, they want to know that you know what you’re doing.