Editor at AngelMatch
While not every single startup needs to raise money to scale, most startups require some investors money to expand their business. When the time has finally come to fundraise, there are tons of potential sources for funding your budding startup. For this article, we shall discuss whether approaching an angel investor or venture capital for your seed round funding is appropriate for your budding startup.
What is an Angel Investor?
Normally, angel investors are individuals or groups of individuals who invest their own currency into an early stage company. “Seed funding” from angel investors are normally one of the first sources of financing for a startup business will seek out (generally after successfully raising initial funds from the founders and their anyone close to them). This seed funding is generally utilized for supporting the business until Seed funding can be reached for generating proper cash flow on its own or until it’s prepared for a more substantial investment. This is typically known as the financing stage where startup companies begin finalizing their investment pitch.
One of the more prominent angel investor networks based in Seattle, Alliance of Angels, will typically hold an amount for an initial seed funding investment by an angel investors somewhere around $25,000 and $100,000. During 2015, angels invested a total amount of $24.6 billion.
Other examples of angel investors in the angel investing industry include the Alliance of Angels, Golden Seeds LLC, Investors’ Circle, North Coast Angel Fund, Band of Angels, Hyde Park Angel Network, Pasadena Angels, and New York Angels Inc.
What is Venture Capital Funding?
Venture Capital funding comes from investment funds that usually pool money from several investors and are formed in order to invest in early-stage companies. Limited partners ( which usually include pension funds, banks, and wealthy individuals) invest money into these venture capital funds, and that money is later invested into startups by the fund’s general partners. Venture Capital firms are usually made up of the partners who lead the investments, associates who help the partners, and analysts who research the investments.
Compared to their angel investor counterparts, venture capitals invest even more money and usually during a later round. Although, because venture capitals are much larger, they tend to commit to fewer deals than angel investors. As of 2016, a total of $69.1 billion was invested in 7,751 companies all over the globe.
Some examples of the top venture capitals include, Accel, Andreessen Horowitz, Benchmark, Index Ventures, Sequoia Capital, Bessemer Venture Partners, Founders Fund, GGV Capital, IVP.
During 2016, angel investors manage to invest a total of $6.6 billion in just over 4,000 deals, and venture capital invested up to $69.1 billion, with a total of 8,000 deals.
Additionally, in between angel investors and venture capitals are a few additional subsets of investors known as super angels and micro-venture capitalists.
Super angels invest early, similar to regular angels, but will invest even more money than traditional angels. Because they are normal individuals and not a part of a huge firm, the process for fundraising with super angels can be much quicker and less demand than when dealing with a large venture capital firm.
Micro-venture capitalists are exactly what they sound like: smaller venture capital funds. They normally invest much earlier compared to normal venture capitalists, and in smaller amounts. Usually, their investments are between $25,00 and $500,000. Another term for a micro-venture capital is a firm that has not properly raised a fund surpassing over $100 million and have a primary focus on pre-seed or seed-rounds.
Angel Investors vs. Venture Capitalists
As two of the most common sources for funding a startup, angel investors and venture capitalists have a number of similarities. Both angel and venture capitalists firms provide for innovative startup businesses, and both tend to favor companies working with technology and science. Even so, there are a number of important differences you need to keep in mind between angel investors and venture capitalists.
Angels Work Solo, VCs are Part of a Company
Angel investors, otherwise known as business angels are individuals who invest their personal finances on a startup. Angels are wealthy, often influential individuals who decide to invest in an incredibly potential company in exchange for an equity stake. Since they are investing their own wealth and there is always an inherent risk, it’s highly unlikely for an angel to invest into a business owner who isn’t willing to give away a piece of their company.
On the other hand, venture capital firms comprise of a group of professional investors. Their capital will come from either an individual, corporations, pension funds, and foundations. These investors are also known as limited partners. On the other hand, general partners are those who work closely alongside the founders or entrepreneurs, they are responsible for managing the funds and ensuring that the company is growing in a proper and healthy way.
The Amount They Invest is Different
If you’re trying to decide on the possibility of approaching either an angel investor or venture capitalist, you’ll need an idea of what each of them can provide in a finance manner. Usually, angel invests somewhere around $25,000 and $100,000 of their own cash, though sometimes they invest even more or less. When angels form their own group, they can usually average a treasure chest of more than $750,000.
Angel investors are typically considered a much quicker solution by most founders because of their relatively limited financial capacity, angel investors aren’t always financing the complete capital requirements of a company. When it comes to venture capitalists, they invest an average of $7 million into a startup company.
Different Responsibilities and Motivations
Angel investors are mainly there to offer financial support. While they may provide some advice if politely asked for it, or introduce you towards some people in their contact network, they may not be obligated to do so. Their level of involvement all comes down to the wishes of the company and the angel’s very own inclinations.
Venture capitalists, on the other hand, are a strong product or service that holds a strong competitive advantage, a talented management team and a large potential market. Once venture capitalists decide to become involved and have invested, it then becomes their job to help develop the company into a successful one, which is where they add true value. Among many other areas, a venture capitalist will provide help when it finally time to establish a company’s strategic focus and recruiting senior management. They will remain on hand to provide advice and act as a sounding board for CEOs. This is all with the goal of helping a company generate more cash flow and achieve success.
Angel Investors Only Invest into Early-Stage
Angel investors will specialize in early-stage companies, funding the late-stage technical development and early market entry. The funds an angel investor hand over can make cause a large difference when it comes down to properly have a company up and running.
On the other hand, Venture capitalists invest in early-stage companies and highly developed companies, depending on the goals of the venture capital firm. If a startup begins to reveal compelling promise and tons of growth potential, a venture capitalist may become interested in investing in the startup.
Venture capitalists will also be much more eager on investing in a company with a proven track record that can demonstrate it has the proper stuff to succeed. The venture capitalists then offer funding to allow quicker development and growth.
Differ in Due Diligence
Due diligence is a part that has provoked tons of debate among angel investors in the past recent years. Some angels do almost little to no due diligence and they aren’t completely bound to, given that all the money is actually their own. However, it has been revealed that when angel investors do at least 20 hours of due diligence, they are five times more likely to see a positive net return.
Venture capitalists are required to do more due diligence, given that they are a trustee responsible for their limited partners. Venture capitalists can invest an excessive amount totaling up to $50,000 when it comes to researching their investment prospects.
Which Should You Approach?
At times it can lead towards some misunderstanding of the various roles and expectation of an angel investor vs an angel investor. Other times it’s a lack of clarity on the part of the entrepreneur regarding what they plan to accomplish with both the company and the financing. Regardless of the reasons behind the confusion, here are some guidelines for determining whether you should be approaching either an angel investor or venture capitalist for your potential financing.
The Amount of Money You’re Raising in This Round
If you’re planning to raise less than $1 million, you’re most likely wasting your time trying to get attract venture capitalists, with two exceptions:1. you specifically aiming for funds that do a seed round, or 2. You have a pre-existing relationship with a venture capitalist firm and want to put together a seed round to get going quickly.
Total Amount of Cash You’re Thinking to Raise Over the Course of Company
If you think you can get your startup to the point where it generates a positive cash flow of less than $3 million, consider staying with an angel investor.
The Type of Company You’re Building
Venture capitalists are known for funding businesses with the potential to become the next big thing. Angels love these as well, but they’re much more willing to fund smaller companies that will presumably require less capital. Furthermore, most venture capitalists want to fund businesses that have transparently laid down the foundations of their economic scale (such as software companies) compared to ones that scale linearly with some factor (such as service companies).
Successful serial entrepreneurs always consider it much simpler to raise money from venture capitalists than angels. If this is your first time as a startup founder, that doesn’t mean you can’t raise venture capital money, but you’re going to find it much more difficult than someone who has an experience as a founder under their belt.
If you’ve never been introduced to a venture capitalist before and none of your people in your network has started companies with the help of venture capitalist funds, you’re at a serious disadvantage by having to begin from scratch. In contrast, if your brother in laws father is the CEO of a Fortune 500 company, you have a solid chance at rapidly getting connected into a powerful set of angels.
Here you have it, the most pressing differences between angel investors and venture capitalists, and the decisions of which to approach is a very personal one for any founder out there. To raise the chances of securing investment and appealing to an investor, you should take some time to consider the creation of a detailed, compelling pitch. With any sort of luck, you’ll end up with the chance of gaining financial and entrepreneurial support to skyrocket your company.