Start-up funding 101: Angel Investors vs Venture Capitalists

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Image Credit – MYOB

You have launched your venture and are slowly and steadily making headway by bootstrapping funds into the business. You are doing great, but it is soon going to be time to pull out the big bucks – something you do not have yet. What do you do?

Funding has been accepted as the most important part aspect of setting up a start-up and very rightly so since trends have shown 94% of new businesses fail. Lack of funding is one of the most common causes for a venture not kicking off.

Yes, there are several ways for you to raise money, but the most sought-after sources are Angel Investors and Venture Capitalists.

As a new business owner, you would have heard these terms often but may not entirely sure of the difference between the two and which one should you go for.

Here are five, easy to remember differences between the two concepts:

  1. Their organisational structure

The first key difference between the two is that an Angel Investor is often an individual, with a high net worth, of course but Venture Capitalists have a full-fledged firm – board members, investors and the works.

Angel Investors usually invest their own money and could even be your family or friends who make the decision about putting their money into your business because they believe in it.

Venture Capitalists are professional investors and they get their income from a variety of sources – corporations, financial firms, insurance companies and more.

The industry has recently seen a spike in angel network groups such as the Indian Angel Network, which bring together likeminded HNIs looking to help start-ups get off the ground. An angel network is also a way of reducing risk in a new investment.

  1. The stage of appearance

Statistics show that only 1 in 10 start-ups get funded and 7 in 10 funded companies wind-up. This translates to a very high risk for investors, especially in the initial stages.

Broadly, there are four stages where a start-up can receive funding – seed stage, early stage, growth stage and expansion stage.

Angel Investors usually invest in the seed stage and early stage, thus taking the highest risk. Like I mentioned earlier, they are individuals who usually have no one to answer to and hence invest their own money in ventures that really impress them.

VCs generally come in the picture in the growth and expansion stage when a start-up has actually proved itself.

  1. The support system

You will meet your Angel Investors when you are just starting off your venture and you can expect a lot of guidance from them – often whether you ask for it or not!

On a more serious note, you can really leverage your relationship with your Angel Investor for business introductions and advice. Remember, they are not really obliged to do so and their involvement in your start-up is entirely their discretion. Hence, it is up to you to milk the fact that you have a mentor in the early stages of your business.

A Venture Capitalist will be able to offer a wider network of support – legal, research, financial, networking and more. Since their investment is also higher, they will usually go all out to help you succeed. But for the very same reasons, they will also really push you to perform and will monitor the business end of things very closely.

  1. The size of their investment

While there is no fixed formula to ascertain this, what has typically been noticed is that Venture Capitalists invest nothing short of $ 2 million and Angel Investors put in between $ 0.6 million and $ 2 million.

The reasons for this difference is the stage the start-up. Angel Investors come in when the start-up needs seed money and Venture Capitalists invest during the growth and expansion stage. Additionally, an Angel Investor is usually an individual or a group of individuals whereas the VC is a full-fledged firm.

Their stake in your venture will be around the same, which as per industry standards is about 20-30%. But the same figure will be very different because your company will be at a different stage on both occasions.

Additionally, the Angel Investor might ask to be a part of the management, but a VC will definitely ask to be on the board.

  1. Their levels of involvement

 An Angel Investor may double as a mentor in the beginning of your venture but like I mentioned above, their level of involvement is entirely their own choice and it is up to you how to manage it. They may not have a seat on your board despite having equity.

A Venture Capitalist on the other hand comes with a team of specialists guiding you to run the business and helping you stay focussed on the objective you pitched to them. While this sounds great, it is a serious commitment as an entrepreneur because it means you cannot change track or have a lot of flexibility with the way you want to do things.

Jodie Fox, a US based entrepreneur and co-founder of Shoes of Prey once said, “When looking for funding, don’t just look for cash. Look for the right people.”

I couldn’t agree with her more as in the long run, that is what will make all the difference.

 

 

About the author

Kalyan Gali

A technology evangelist who has played the role of virtual CTO of over a dozen tech start-ups globally, with several of them now becoming renowned names in their verticals. I’m a digital professional, leader and strategist. Most of my colleagues and gurus say am expert in business communications, product management, User product design, startup strategies, creative direction and process design.

I love making new networks or professional tie-ups. You can reach out to me if you want to talk numbers, technology, usability or movies.

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