Differences Between Angel Investors and Venture Capital

01 Nov Differences Between Angel Investors and Venture Capital

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Differences Between Angel Investors and Venture Capital

angel-investors-venture-capitalNew businesses are always short on capital. It’s almost an immutable law of the universe that any new business that starts is going to struggle for money until sales start happening and income begins to exceed expenditure. That lack of capital is one of the major reasons why so many potentially great businesses fail within a year of starting and the lack of capital is one of the major problems for many businesses even beyond that first year.

With limited funds it’s difficult to hire the experienced and talented people that a business needs to grow. With limited funds it’s difficult to develop products to their full potential. With limited funds it’s difficult to meet operating costs, pay taxes and, if you’re the person who has started the business, even put food on your own table.

Many owners of businesses that are just starting out hope to weather those difficult early years with the help of family, friends and plenty of good luck and undoubtedly some do succeed. However if that’s what you’re hoping will get your new business through the survival period then I have to tell you that the odds are very firmly against you. If you want to have the very best chance of taking your small business through that early survival period and on into a time when it can really grow and prosper you’re going to need more capital than your family and friends can provide … you’re going to need capital from outside investors and you’re going to need to understand the difference between angel investors and investors who provide venture capital.

Once you understand the difference between those two … and how that difference will affect you … then you will have a far better chance of raising the funding that you will need.

Angel Investors – Angel investors, by their very nature, are far more likely to be risk takers than a venture capitalist might be. An angel investor … like any investor … wants to see a return on their investment but they’re also motivated by a desire to see new and perhaps innovative businesses get off the ground and succeed.

A typical angel investor will invest in a business that’s part of an industry that he or she … or they … know, understand and are possibly involved in. Angel investors are looking to invest in a business in the early stages and their investment doesn’t just involve money.

An angel investor will more than likely want to offer advice and support to the business that they have invested in. An angel investor will also want to have a stake in the company and some control as well and that’s only reasonable. If you’re the business owner then you can’t expect any sort of investor … even an angel investor … just to give you the money and let you do whatever you think you need to do with it.

So if you’re seeking money from an angel investor you have to be prepared to give them some control over you and your business. The amount of money you might expect from an angel investor would be in the range of around $25,000 up to perhaps a $100,000 if the investor is an individual or perhaps even more if the angel investor is a group of people.

Of course, even though angel investors work with startups they do expect to see a good return on the money that they have invested.

Venture Capitalists – Once your business is up and running and you’re over those first early hurdles then you can start thinking about obtaining funding from venture capitalists. However, at that point it’s important to understand the stage that your business has reached for venture capitalists tend to focus on different stages in the life of a business.

Some venture capitalists like to invest in a business immediately after a business has moved beyond the angel investor stage while others prefer to wait a little longer before they invest and will only be interesting in investing after a business has received a first or even second round of venture capital investments.

Unlike angel investors venture capitalists are more motivated by profit than anything else and so they’re going to be looking to invest in businesses that will offer security and a high return on their investments. While angel investors limit their investments to relatively small amounts venture capitalists tend to think of a starting point for funding to be around $500,000.

It’s quite likely that, if your business reaches the stage where it will be attractive to venture capitalists, you will find that they expect to exercise even more control over your business than an angel investor and they will be very focused on defining the goals of your business and the point at which they will expect to have their investment repaid.

Finding the Right Investor – While it’s quite easy to understand the difference between an angel investor and a venture capitalist and knowing which one is right for your business actually finding an investor and giving them the documentation that will encourage them to invest in your business can be quite difficult. Just because you’re sure that your business deserves funding doesn’t mean that an investor will see it the same way.

If you want to maximize your chances of obtaining the right level of financing on terms that you can afford then you really need professional help and that’s where a business advisor can make a difference.



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