When startups are looking for capital, there are a number avenues they can go down to acquire the cash they need to grow their business. Some startup founders opt to lease equipment, others approach the bank for a loan, while others turn to family and friends for funding. Many startup founders, however, are willing to give up shares in their venture in exchange for the much coveted cash they're after. There are two principal investor types that are heavily involved in the startup scene: angel investors and venture capitalists.
What is an angel investor?
Though their goals are similar to those of venture capitalists, angel investors differ significantly from VCs. An angel investor is normally a single individual who has a considerable net worth. They provide capital to entrepreneurs (sometimes friends or family members of the angel) or startups in exchange for a share of the business. This capital can be provided as a lump-sum payment or continual support.
Because angel investors are single individuals, they invest in fewer businesses than VCs. A VC firm can invest in dozens of startups each year, whereas an angel investor will typically invest in one or two firms at a time, depending on their ability to supply capital. As a result, they tend to be more risk averse than VCs; since they're only able to invest in a handful of startups, each investment is expected to generate a return.
What is a venture capitalist?
Venture capitalists are firms that specialize in investing in startup businesses that have serious growth potential. VCs often partner with high risk/high return startups and, as a result, are comfortable -- relatively speaking -- losing their investment on many (even most) of the startups they invest in -- all in the hopes that one will break out and generate a massive ROI. They're essentially chasing the next Google, Facebook, Airbnb, or Snapchat. For every homerun a venture capital firm hits, there are dozens of failed investments. In fact, in a typical VC portfolio, most of the returns are generated from just 20% of their investments.
Why choose an angel investor?
No lengthy due diligence process: Venture capitalists take a long time to decide whether or not to invest in a business. While they are in the business of taking high-level risks, they have an extremely comprehensive process to evaluate and vet these risks as best as possible.
Maintaining creative control: Venture capitalists will often stipulate that, as part of any deal, they gain some creative control over the business. The may force the startup to partner with other startups that the VC has invested in, or make the startup work with a particular supplier. Startup founders who are looking to maintain total creative control over their business are better off approaching an angel investor as opposed to a VC, as angel investors are known to be more hands off, while at the same time providing valuable mentoring.
The investment needed is modest: Most startups don't need millions of dollars when starting off. Venture capitalists, however, normally invest a minimum of a few million dollars. If a startup only requires a small team to build the business and has low operating costs, there is little point having all of this funding. Instead, an angel investor can provide it with workable amounts of capital.
Why choose a venture capitalist?
The investment needed is significant: If, on the other hand, a startup requires needs a lot of startup capital, then venture capitalists can provide it with millions of dollars in cash. The average seed stage round investment, according to a report by the National Venture Capital Association and PricewaterhouseCoopers was $3.7 million in 2014.
Access to a vast network: Venture capitalists have years of experience getting businesses off the ground and are on good terms with suppliers, retailers, marketers, etc. For startups that are looking to expand their network, a VC can help establish relationships and favorable terms on its behalf -- something that many startups otherwise would not have access to.
At the end of the day, deciding between approaching angel investors and venture capitalists all comes down to what suits your business the best. There is no use in trying to get millions of dollars in funding from a venture capitalist firm if your business only needs $50,000. If, on the other hand, you require a relatively small amount of capital, would be interested in working with a mentor, and wish to remain in control of the business, you should approach an angel investor. If you need access to large amounts of capital, as well as a network of industry professionals who can help connect your business to the right partners and contacts, then start preparing your venture capitalist elevator pitch -- you're going to need it.