If you’re thinking about expanding your business or starting a new venture and are unwilling or unable to take on additional debt, you might want to consider looking for investors to make your launch feasible.
Angel investors and venture capitalists (VCs) offer two different types of investment solutions. Understanding what each has to offer, as well as the risks they’re willing to take, can help you determine whether either of these investment sources is worth pursuing.
What Are Angel Investors?
An angel investor is an individual or group of individuals who provide their own financial resources to help fund startups or business expansions. While some angel investors may be wealthy relatives or friends, most are experienced investors accredited by the Securities and Exchange Commission. To become accredited, the investor must make at least $200K annually ($300K if he or she is married) and have a minimum of $1 million in assets.
For planning purposes, it’s important to understand that an angel investor typically is engaged in the early support of a startup, and usually invests less than $100K into the business. If it is a group of investors, they might be willing to pool resources and invest even more.
Are angel investors right for your business? Here’s what to consider before making up your mind.
You may have also heard about “super angels.” Super angel investors — who, like other angel investors, use their own money — can provide up to $1 million in capital to a new venture or startup.
When determining how much funding to invest into a new or growing business, angel investors evaluate the equity of the new venture, so they can determine how much of a stake in the business they’ll need to take. Angel investors typically take ownership of between 20% and 40% of a business, depending on its valuation. If a group of angel investors provides $500K to a company valued at $1 million, for example, the new valuation becomes $1.5 million, and the angels now own 33% of the company.
What Are Venture Capitalists?
A venture capitalist is a professional whose role is to invest in a new or growing business that has a realistic potential for high profits. A VC firm does not use its own funds when investing in a startup, but rather capital culled from a variety of sources, including large corporations, wealthy investors, investment corporations or subsidiaries of investment banking firms, pension funds, insurance companies or other similar resources. Their investments are typically bigger than those of angel investors and are often measured in millions rather than thousands or hundreds of thousands.
When venture capitalists fund a startup or a company in its early stages, they typically seek 20% to 30% of the company with an expectation of anywhere from a 10% to a 100% return on their investment.
How Do Angel Investors and Venture Capitalists Support Their Investments?
Because investing in a new startup or venture is considered high risk, both angel investors and venture capitalists take an active role in their investments. They are likely to bring in their own consultants or executives to help manage and grow your company and may even take a seat or several seats on your board of directors.
If your company demonstrates a high growth potential and the need for additional investment, angel investors might be inclined to seek out a VC and sell their share of your business to them.
Venture capitalists have a variety of exit strategies for their investments. If the startup has proven very successful, for example, the VCs may decide to go the route of an initial public offering. Or they may sell the company back to the entrepreneur. If the company fails, the venture capital firm may decide to sell the business’s assets to try to recover as much of their financial losses as possible.
Tips for Meeting with Angel Investors or Venture Capitalists
When meeting with a professional investor for the first time, make sure to have an elevator pitch prepared—and be sure to rehearse it.
Both angel investors and venture capitalists will want to see a comprehensive business plan including market demand, market size and the anticipated return on their potential investment. Investors need to know not only how your idea or product is different or unique, but also what makes it profitable.
Both angel investors and VCs will want to know more about you—your background, your expertise and your personality. They are investing in you as much as in your product or idea, so they need to be certain you have the perseverance, passion, focus and confidence necessary to achieve success.
Other qualities investors want to see in an entrepreneur include:
- Strong communication skills
- A comprehensive understanding of risk
- The willingness to take advice
- Market and operational adaptability
- Originality in the business idea
How to Find Investors
Most communities have angel investors who regularly participate in entrepreneurial activities such as business summits, startup showcases or networking events. Venture capitalists are interested in entrepreneurs with high-profit or high-value business concepts and may attend startup conferences or competitions.
For most new businesses, angel investors should be considered before venture capitalists. Angel investors tend to gravitate toward businesses with good ideas that they can help grow into profitable companies. Venture Capitalists are typically focused on maximizing profits and revenue as quickly as possible, which is why they tend to gravitate toward established businesses looking to grow.
You can find investors at:
If you don’t feel you are ready to seek out angel investors or venture capitalists to fund your startup, other forms of funding are available. You can also reach out to a SCORE mentor for valuable guidance with evaluating what forms of funding will be most appropriate for your new venture.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.