If you’ve spent any time here on the Merchant Maverick website, you already know what most business owners are looking for: funding. Sure, we all want to be successful and fulfilled by doing what we love, but the only way businesses can do that is with access to capital.
Of course, you can always hit up your local bank or credit union, search around the web for online lenders, or launch a crowdfunding campaign. But why limit yourself to these options when you can attract investors that bring capital, industry experience, and so much more to help your startup business grow.
Whether your startup is already showing signs of success or your business is still just a plan for the future, if you’re interested in how investors can help you take your business to the next level, then this article is for you. In this post, we’re focusing on two types of investors: venture capitalists and angel investors.
It doesn’t matter if you have a little bit of knowledge about these investors, or you’ve only heard them mentioned in news articles. This post breaks down the definition of each, explores the differences between the two, and even offers recommendations for how to choose the best option to fit your business’s needs. So sit back, relax, and let’s jump in.
What Are Venture Capitalists?
A venture capitalist is an investor or firm that gives businesses the money they need to grow from a fund â a pool of money from multiple people. Unlike a traditional loan, this capital doesn’t get repaid on a set schedule. Instead, the investor receives equity in the company â in other words, ownership within the company. We’ll explore equity and what it means a little later.
Venture capitalists typically invest in businesses that have high growth potential. Businesses that receive capital from venture capitalists should be poised to move quickly to grow and expand. Most often, businesses that are funded by venture capitalists are already somewhat established.
What Are Angel Investors?
An angel investor is a little bit different from a venture capitalist. An angel investor is an individual (or in some cases, a group of people) that is well-off and wants to invest in a business in exchange for equity or convertible debt. The invested capital doesn’t come from a fund but instead comes directly from the angel investor.
Angel investors also typically gravitate toward companies with high growth potential. However, angel investors are more willing to take on higher-risk businesses, such as startups and early-stage businesses.
Angel Investors VS Venture Capitalists: Key Differences
Are you still scratching your head? Let’s break down the definitions of angel investors and venture capitalists, then take a look at the key differences between the two.
When you work with a venture capitalist, you will work with a venture capital firm or employee of a venture capital firm. This individual or group uses a pooled fund to provide businesses with capital. The pool could include funds from corporations, university endowments, pension funds, and/or other big investors.
If you work with an angel investor, you will receive capital from a successful, wealthy individual or even a group of well-off individuals. This money doesn’t come from a fund but instead comes directly from the individual or group. In other words, they are using their own money, not someone else’s.
Angel investors are not required to be accredited, but many are, which means that they either earned $200,000 per year over the last several years or have a net worth exceeding $1 million.
Types Of Businesses
Venture capitalists provide capital to businesses with high growth potential. These businesses are typically in a position to grow quite rapidly and have already shown a history of success. These businesses can be in a variety of industries, from food startups to up-and-coming technology.
Angel investors, on the other hand, are more willing to work with businesses in their very early stages. Once a business has used other methods of funding, such as friends and family, small business loans, or crowdfunding, it may opt to seek capital from an angel investor before working with a venture capitalist.
Angel investors typically invest in businesses that they are familiar with. Someone who made their money off software or real estate, for example, would be more apt to invest in a new software company or real estate venture.
Another big difference between venture capitalists and angel investors is how much they are willing to invest.
One thing to note is that the amount invested varies based on a number of factors, so these are just a few averages to give you a better understanding of what type of capital each kind of investor is willing to invest.
Venture capitalists invest a much higher amount of money â think millions of dollars. On the flip side, angel investors are more conservative, investing, on average, about $25,000 to $100,000 per company.
Equity & Convertible Debt
Whether you receive capital from a venture capitalist or an angel investor, the repayment terms are different from other forms of business funding (such as business loans). Business loans and lines of credit are types of debt financing. That means the business repays the money it borrowed as well as fees and interest assigned by the lender.
Capital received from venture capitalists and angel investors is known as equity financing. Instead of repaying borrowed funds, the investor receives an ownership stake in the business. This means the investor is entitled to a share of the profits and may also be able to make important decisions regarding the business.
How much equity exactly? Well, it depends on multiple factors, including the amount of the investment and the expected return. To get a general idea, venture capitalists may expect equity from 10% to 80%. That’s a very large range, but again, there are multiple factors to consider, and every deal is different.
Angel investors generally expect equity of 20% to 50%. While this can be quite a large share of ownership, remember that these investors are more apt to take on riskier businesses in very early stages.
While both types of investors are repaid through equity, there is one minor difference between the two. In some cases, a borrowing agreement with an angel investor may include convertible debt. Convertible debt is debt that can later be converted to equity â ownership in the business â at a later time as agreed upon by the investor and the borrower.
Now, what happens if the business isn’t successful? Will you be required to pay back the investment made in your business? The good news is that no, you won’t necessarily be on the hook for repaying your investors. However, the investors could liquidate your business and collect all or a portion of their investment if your business fails.
One of the biggest advantages of having an angel investor or venture capitalist back your business is that you can obtain more than just capital. While the resources available to you vary depending on your industry and the investor you work with, your investor may have ways that can help fuel growth and improve your odds for success.
In addition to the capital you’ll receive from a venture capitalist, these investors can also help you build industry connections or even find access to other sources of funding.
Angel investors â particularly those that stick with what they know â can often serve as mentors. An investor that made millions in real estate, for instance, can teach you the ins and outs of the business, share industry secrets with you, and help your real-estate-focused company grow.
Which Is Best For My Startup Financing Needs?
Are you ready to take your startup to the next level by seeking out an investor? Before you do, understand which type of investor is best for your business. Know the needs of your business, understand what to look for, and you’ll be ready to take the next step toward getting funding.
Look For Venture Capital If…
- Your business has tapped into all other financial resources, including friends and family, crowdfunding, and other types of funding
- Your business is at least somewhat established and is poised to grow once you have secured an investor
- Your business is very innovative and/or has high growth potential
- Your business needs a large amount of capital â for example, $1 million or even more
- Your business is positioned to see a large amount of growth and profit that’s worth investing in
- You’re prepared to give up equity and control within your business
Look For Angel Investing If…
- You’ve used some financial resources, but you’re not yet ready for venture capital
- Your business is new or in the very early stages
- Your business needs a smaller amount of capital to grow
- You’re prepared to give up equity and/or take on convertible debt
- In addition to capital, you want your investor to bring industry experience and knowledge to the table
Learn More About Angel & VC Funding
Still undecided on which path to take? Or perhaps you just want to know more about these two forms of alternative funding. If so, check out our other great resources about angel investors and venture capitalists. As with any other type of business funding, make sure to do your research, explore all options, and weigh out the pros and cons. Good luck!
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