As an entrepreneur who’s just getting started, you’ll learn a lot by doing in the next couple of years. Starting a business involves so many different components, and no one goes into running their first company knowing how to do everything—it’s simply not possible. While many aspects of business work themselves out through tinkering and experimentation, others, like funding, require more research and planning. It’s easy to switch up your marketing strategy at the drop of a hat, but it’s harder to change course when you’ve chosen the wrong investors.
If you’re overwhelmed by the options for funding, you’re far from the only entrepreneur feeling lost. Bootstrapping, crowdfunding, small business loans—there are pros and cons to each different funding option, and deciding which ones will work well for your business can be difficult. Though there are many ways to go about getting funding, today we’re going to look at two of the most sought-after investors: angel investors and venture capitalists. We’ll look at the differences and similarities, plus the pros and cons of going with these investors.
The Basics of Angel Investing and Venture Capital
At their core, angel investing and venture capital are similar. Both look for startups to fund, and offer promising companies capital to help them grow—in exchange for stake in the company.
Venture capitalists operate in groups through venture capital firms with considerable means, however, and are interested in investing at least 3 million or more in promising startups. They have a responsibility to their partners to return a profit, meaning that they are extremely risk-averse. Angel investors are independently wealthy and work alone or in small groups, tending to offer startups smaller amounts up to 3 million. This usually means that venture capitalists support more established startups, while angel investors are more likely to back entrepreneurs and provide seed funding. Both types of investors have the same goal though: to make money in the long term.
Both angel investors and venture capitalists want to be reasonably sure that the startups they invest in will produce a solid return on investment. That’s one reason it’s so important for entrepreneurs to perform market research. Investors are going to want to see why they should invest. Public opinion is important for investors—they need to know there’s a market for the product or service, and that there’s not too much controversy potential that could sink the company.
For example, biotech is becoming a hot field for startups partially because public opinion of the field has improved in the last decade or so. Investors know they’re not going to get a sure thing with any company, but they try to take educated risks, and have a lot of companies to choose from.
The Pros and Cons
As with all investing options, there are pros and cons to working with angel investors and venture capitalists.
Angel investors…
- Are more willing to support early-stage startups
- May not require the entrepreneur to relinquish control of some decision-making
- Can act as a mentor to entreprenurs
But…
- They ask for a larger stake in the company
- Cannot offer large amounts of capital
Venture Capitalists
- Can offer startups large sums of money for growth
- Not a loan, so repayment is not an expense
But…
- Will take control of some key decisions
- Not usually willing to take risks on new companies/entrepreneurs
Which is Right for You?
While it might seem like deciding between angel investing and venture capital is a difficult task, it’s actually pretty simple to figure out which is better for your business. In general, angel investing is better for entrepreneurs and companies that are just starting out. They’re usually more willing to take the risk of an early-stage startup, and they won’t be interested in investing as much as a venture capital firm.
Venture capital tends to be better for companies that are already off the ground, to some extent. Startups that are interested in scaling and growing and can use a large amount of capital can benefit the most from working with VC firms.
It’s important to remember, however, that these are just two options for funding—early-stage entrepreneurs might also want to consider other options that often have lower stakes like crowdfunding or bootstrapping.
Chasing the Next Unicorn
Whether you’re interested in working with an angel investor or a venture capital firm, you’re going to have to work very hard to pique their interest. Venture capitalists in particular are always chasing the next “unicorn,” a term that describes a startup that reaches at least a $1 billion valuation before it is 10 years old. Just 1.28% of startups achieve that distinction, and even fewer achieve the coveted “super unicorn” distinction: under 10 years old and $100 billion+ valuation. Is your idea unicorn-worthy? Maybe, maybe not. But if you want to get funding from big players in the field, you’ve got to convince them there’s a good chance you can get there—and make it worth their while to invest.
References:
Hofstra University Health Law & Policy Online
INC
Ohio University Online Master of Accounting
Quickbooks
