When entrepreneurs are ready to take their business to the next level, they may begin searching for other resources to help finance the leap. The search for funding has to begin within the organization. Is there a solid plan for growth of the business? Has the brand been successful with attracting customers? Are the financials in order? Once these very important questions are answered, a business owner needs a clear understanding of the types of investors that are available and ready to fund the venture.
What is the difference between angel investors and venture capitalists?
Angel Investors, Explained
An angel investor is an individual with a strong net worth who is willing to use their own funds to make an investment. Angel investors have a net worth value of $1 million or annual income of $200, 000 or $300,000 if they are a married couple. Angels generally invest in the entrepreneur who has the business or startup idea and therefore makes the investment early in the life of the business. In many cases, angels will help launch the business and/or assist with growing the business so it will be attractive to venture capitalists.
What is a VC - Venture Capitalist?
Venture capitalists, also called VCs, are typically firms or partnerships with individual partners contributing to a fund to invest in businesses. VCs look to make larger investments and seek to bring the highest returns for the partners involved. The venture capitalist's investment will happen after the company has matured and requires funding to expand into the market. Because the goal is to bring profits back to the VC partners, venture capitalists will seek a business that has already experienced some success and has the potential for large growth.
How to Decide Between Angel Investors or Venture Capitalists?
In order to decide which type of investor is better suited for funding, the business owner or entrepreneur needs to answer the following questions:
- What is the current stage of the business?
- If it's still early (seed rounds), an angel investment could help get the idea off the ground. If the idea is successful and needs capital to bring it to a larger market, a VC investment is a better fit.
- How much capital is needed?
- Angel investments can be smaller amounts, $25K - $100K. Venture capitalists may invest $3 million or more.
- How quickly is the capital needed?
- Because angels are investing their own money, they may only need a few meetings to make a decision to invest or not. VCs, on the other hand, have a group of investors to consider. They may do considerable more research before making a decision and the decision-making process may take much longer.
- How much involvement is expected from the investor?
- Angels may not request much involvement except to assist with networking the business among their well-off connections and/or have some say in the spending. Venture capitalists may be more hands-on, seeking a seat on the board of directors (also a VC requirement) and having more say in business decisions.
- How soon should investors expect to see a return?
- Angel investments are helpful when launching a business or looking to see if an idea will stick. Angels typically want to get in early and then get out within a few years. VCs invest much later and are more involved. Their investments could be up to ten years. Both expect an average return of 20 - 30% annually.
Is the Business Ready to Raise Funding?
There are several other questions that need to be answered to know if the startup or business is ready to seek funding from either angels or venture capitalists. Running with an idea is one thing but those who may look to invest in a business want to know that the financials are organized and the business plan has been thought out for five years or more. Pay attention to what other startups have done to attract investors. Consider some best practices for accounts receivable and collections to help get the business ready. Do what it takes to prove that the idea is not only interesting to the potential market but organized and set to grow.