The world of startup funding can be tricky to fathom, particularly when you’re just starting out. Trying to work out how much cash you need and how to get it is a headache – especially when you’ve got a lot on your plate (as most startup founders invariably have)! We’re here to help you out by explaining the differences between two of the most common sources of startup funding: Angel Investors and Venture Capital.
Angel Investors are typically private individuals who invest in your business alone, rather than as part of a company. Beyond that, however, the world of angel investment is pretty variable, ranging from small sums invested by people who’ve taken a shine to your product, to more formalised business deals and larger amounts. While they are autonomous, some angels do also work as part of syndicates, teaming up with other investors to do bigger deals.
Angels also vary in how involved they will be in your business, with some simply signing the cheque and then taking a back seat, and others wanting more input, or perhaps a seat on the board. Angel investors are usually very knowledgeable about business, and often former entrepreneurs themselves, so their advice can be invaluable in a startup’s early stages.
The key thing which differentiates an angel investor from a venture capital firm is that, ultimately, the angel makes their own decision about the investment and its terms. The deal you strike will be with the investor themselves rather than a wider organisation and as a result, the whole thing is also a lot more flexible. But on the flip side, the amounts on offer also tend to be smaller.
Angel investment is, therefore, best sought out if you are in the early stages of building your business, perhaps seeking seed funding with which to develop a prototype or MVP (minimal viable product).
Venture capitalists (VCs) tend to operate in firms, which means the deal you strike will be with the company as a whole, not with an individual. As such, the process tends to be more formalised, with set conditions and expectations for each party.
The level of funding and resources on the table is also usually higher with a VC firm than it is with a typical angel investor. However, in return VC firms will be expecting you to deliver big on their investment and you may find yourself ceding a level of control in your business as part of the deal.
While this can be difficult for some founders, it can also be a big advantage. As they have a vested interest in your success, VC firms will use that control to help steer your company towards profits. But bear in mind that not all companies or management styles are suited to this kind of external influence - and the pressure that inevitably comes with it.
Both angel investors and VCs will want to see evidence that your product is viable and has the potential to succeed, however, given that the stakes are generally higher, VC firms will usually want to see more from your pitch than most angels would, in terms of a proven product, customer-base and talented team. As such, VC funding is best suited to firms which are pretty much (if not already) market-ready and have a basic management structure in place.
Which type of investment is right for you?
Choosing whether to go for angel investment or VC funding depends on three things:
- The stage your business is at
- The nature of your business
- The nature of the investor/firm
As a general rule, angel investors are good for early-stage startups, while VC funding usually comes a bit further down the line. However, if your pitch and product are inspiring enough, a VC firm may invest at an early-stage. Similarly, the right angel investor may well put their money behind a more advanced startup. It all depends on your (and their) particular circumstances.