When companies are looking for funding, they may be interested in working with an angel investor or venture capital firm. Some business owners may believe that angel investors and venture capital firms are interchangeable, but these two types of investors have different functions and can confer different benefits.
Dan Lok explores the difference between angel investors and venture capital firms, explaining the ways that these investors can help companies at different stages in their lifespan.
An angel investor is most likely to want to help a company in its early stages. Angel investors are generally people with a high net worth who have a certain level of risk tolerance.
Angel investors are often accredited investors who want to work with startup businesses or those in the early stages of development. The seed funding and Series A rounds are the most common times for an angel investor to provide funding.
These investors are able to fill in the gap between drawing financing solely from friends and family and going to banks or venture capital firms. Angel investors may be in it purely for profit, but frequently they look to make an impact with their money by investing in causes that they are passionate about.
Typically, angel investors’ contributions range from $150,000 to $2,000,000. This can make a huge impact on a new company’s chance of success.
One aspect that differentiates angel investors from traditional venture capital firms is that they are more likely to offer business mentoring and guidance. Angel investors often provide networking help to their sponsored companies as well as bringing them expert advice.
Angels make high-risk investments. Typically, angel investments make up no more than 10 percent of an investment portfolio. Angel investors are looking for companies with a great team that could return 10 times their investment in 5 years. The financial benefits tend to come when a company has reached its initial public offering (IPO) or has been acquired by another firm.
Angel investors are particularly interested in internet, healthcare, telecom, energy, electronics, and consumer products companies. They may consider other types of companies, but these sectors are the most commonly supported by angel investors.
One of the biggest advantages to startup companies is that angel investors are likely to be more flexible in their terms than banks and venture capital firms. They may also be interested in sharing a company’s information with a friend who is also an angel investor, leading to more opportunities for financial investment.
Venture Capital Firms
When a company has passed the earliest stages of its development, it may be able to attract attention from venture capital firms. Venture capital firms generally step in after angel investors, covering the middle stages to the maturity of the new company.
Many startup entrepreneurs believe that venture capital firms will make them rich. However, venture capital firms are not likely to invest until the company has passed a certain level of success and have evidence of their potential.
The public perception of venture capital firms is that they are responsible for the major portion of a new company’s funding, but this is only partly true. Most venture capital funding is centered around R&D, or the development of new ideas by an established company. Only about 6 percent of venture capital funding goes to startup companies, and the number of companies that receive this funding is vanishingly small.
Venture capital funding is involved during the period when the company is beginning to commercialize its products. In order to get venture capital funding, a company needs to show that they have a valuable product and a strong customer base already in place.
As with angel investing, the venture capital firm is interested in recouping its investment when the company either goes public or is sold to a larger company. The funding is not meant to be long-term in nature.
Venture Capital Funding Versus Bank Funding
Banks frequently do not want to take risks on startup companies. Laws against excessive interest rates prevent them from charging the interest that would justify such an uncertain investment. Bankers only finance new businesses when they have hard assets. Unfortunately for many startups, especially in the technology field, they do not have hard assets to offer to a bank.
Getting Funding for Your Startup
If your startup company needs funding, you may want to look into angel investing or venture capital funding. Be aware that these types of funding are difficult to get and that your company must meet certain criteria, especially where venture capital is concerned.
Dan Lok encourages all startup business owners to learn more about the world of angel investing and venture capital, exploring different avenues of funding their enterprises.