When you’re looking to fund your start-up, should you pursue funds from an angel investor or a venture capitalist? Your first response may be: whoever will give me money! Sure, you may be at the point where you feel ready to take money from whomever will give it to you, but it’s actually more complicated than that. Before targeting a potential funding source, there’s a lot to consider. You may want to begin by thinking about the following:
- What stage is your company in?
- How much money do you need?
- What, besides money, do you hope to get out of this relationship?
- What do you not want from an investor?
Answering these questions will help you clarify what you’re looking for, who to pitch to, and how to get funded.
Let’s break it down:
1. The State of Your Company
Ultimately, the choice of whether to pursue funding from an angel investor or venture capitalist may not really be a choice. A lot depends on the stage your company is in, growth-wise. If you are just starting out, angel investors may be a good fit. But if you are ready to move your company to the next level, you may need a venture capital infusion.
Time pressure is also a factor. If you’re in a rush to get to market (and who isn’t?), venture capitalists might put a wrench in your plans as they will take their time doing their due diligence before they will write you a check. Since angel investors are individuals, there is a lot less red tape. And since they may even be your friends or family members, they are probably more invested in helping to support you in a shorter time-frame.
2. The Capital Issue
At heart, the issue of funding is about the capital. That said, you probably already know that angel investors have relatively little money and venture capitalists are the source of bigger bucks.
But before you get caught up in “show me the money” mania, consider these three capital components, because it’s not just how much money you can raise, but how difficult it’s going to be to raise the funds, and what price you’ll pay for this investment.
Amount of Capital Invested
- Angel investors are usually individual investors who are just looking to grow their own money. For this reason, they usually invests smaller sums of money for smaller ventures just starting out. On the other end of the spectrum, venture capitalists are the big-time. Usually comprised of groups with huge funds, venture capitalists generally invest a minimum of $2M. This is why how much funding you need will dictate what kind of investors you pursue.
Contact Early Growth Financial Services for help targeting your capital needs.
Ease of Raising Capital
- Angel investment is easier money. It’s just a simpler model wherein you deal directly with individuals. In many cases, your angel investor may be a friend or relative or a high net-worth individual with savings to spare for the chance at a big payout. If you need to raise a large amount of money, an angel investor may not be able to deliver though. This will leave you having to seek out multiple investors which can be time-consuming (and exhausting...unless you relish the idea of constant pitching).
If you’re working with a professional angel which is becoming more and more prevalent (we’ll address this growing area in a future post), the money may be harder to come by. But it will still be easier than working with a venture capitalist. VCs are the harder sell because, after all, this is their business. Asking a venture capitalist for an investment is a more formal and involved process. Compare telling your grandmother about your dream start-up and asking for $5000 with creating a pitch deck complete with competitive analysis, market strategy, and financial details. Get the picture?
The bright side is that once you’ve hooked a venture capitalist, they will be more likely to invest in later rounds so you won’t have to hop back on the hamster wheel for the next round of funding.
Amount of Capital Returned
- With an angel investor, you are usually going to pay less of a premium in the amount of the stock or percentage of your company you give up. Because investment isn’t their only venture, angel investors might not be looking for a specific level of return. And you’ll likely have a greater ability to renegotiate along the way if, say, you suddenly need to change your stock issuance.
Venture capital firms are more likely to take a larger piece of your company and require more stock. And, if the nature of your business changes—and you need to change along with it—your suggested changes will likely be met with more resistance.
3. Non-Monetary Benefits of Receiving Capital
When seeking funding, think outside the (money) box to consider what other benefits you may get from your investors. These non-money “perks” can be almost as valuable as the actual capital.
- Venture capitalists know business. That’s their job. If a venture capitalist has decided to make an investment in your company, it means they understand what you are doing and the market potential. This makes them a great informed resource for you. It’s less likely that an angel investor is going to be fountain of knowledge in your particular industry. But, angel investors may have a personal interest in what you are doing and the wisdom of a “been-there-done-that” entrepreneur, if you have general questions about starting your business. So you may want to think about what knowledge gaps, if any, you personally need to bolster and seek investors accordingly.
- While angel investors can have experience investing in multiple companies, it’s generally not their business focus. They are just professionals, with their own money, who are looking to invest and reap the rewards (financial and otherwise) of investment. Venture capitalists, on the other hand, are professional investors: their job is to find solid investment opportunities. Essentially, venture capitalists are fund managers who are sophisticated, experienced and comfortable making risky investments, using OPM (other people’s money). With venture capitalists, you are both coming to the table knowing what you want out of the relationship and how to get it. Is investing experience an important factor for you?
- A venture capital firm is going to be very incentivized in making sure their money is well spent and, due to the nature of their business, they will most likely be able to connect you quickly with the appropriate partners and resources to develop your business. Depending on your industry, and the background of your angel investor(s), they too may be helpful for growing your network, but they probably don’t have as many connections as a venture capital firm. Who is going to be most helpful in connecting you to the people who will help your company to take off?
- Depending on the angel investor, your company, and your industry, you may or may not find yourself with an investor who wants to get very involved. It’s rare for an angel investor to wind up with a board seat. So if you don’t want investors stepping on your toes, this may be the best choice for you. If you want more—and more structured-—investor involvement, a venture capital firm might be the better choice for you. You will probably be assigned to work with one or two specific members of the VC team. Also, in exchange for their investment, venture capitalists will likely expect a seat on your board to stay as involved as possible in your company and how you use your investment funds. How much investor involvement do you want?
4. The “Costs” of Funding
It is of equal, if not greater, importance to assess what you do not want out of your investor relationships. If any of the following give you pause, take note:
Herding cats and hand holding
- Angel investors are generally much less sophisticated than venture capitalists so managing your angel investors can seem like a job in and of itself. On top of managing your own business, you may need to manage these investor relationships. With multiple investors, this can lead to a seemingly endless parade of regular check-ins and updates as you attempt to educate your investors about the nature of your business, the current economic climate, competitive risks, and a whole host of other issues.
Sharing the reins
- If one of your main concerns in starting your business is that you stay in control, you need to know that this is less likely when you assume a relationship with a venture capital firm. Venture capital comes with venture capital strings. Your venture capital firm will have strong preferences for their invested dollars and are not likely to defer to a CEOs preferences. This can potentially create an awkward, if not downright nasty, dynamic between CEOs and VCs.
Getting funding is a rich topic. As you can see, it’s more complicated than a simple table of pros and cons for angel investors versus venture capitalists. Your company, your personality, your financial needs—all of this needs to be factored into the equation. And I’ve only just scratched the surface here. In future posts, I’ll talk more about different kind of funding, how to appeal to different types of investors, and how to best manage your investor relationships. But hopefully this brief overview will help you to start thinking about who to go to to get the funding you need to successfully launch your company.
Not sure what kind of funding your start-up needs? Tell us about it in comments below, or contact Early Growth Financial Services with your funding questions.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.