Every business starts with a dream, but every successful business pairs the dream with the capital to make it happen.
As a founder, one of your first responsibilities is finding an investor for your startup. But, with so many options available to you, how can you be sure which will be the right source of funding for your business?
Here, I’m going to explain the differences between the two most common types of startup funding – angel investors and venture capital.
Angel investors are usually wealthy individuals who invest their own money to fund startups in return for a degree of ownership equity in the company.
Most, but not all, angel investors have an “accredited investor” status. This means that they’ve either made at least $200,000 in two consecutive years and expect to make the same going forwards. Or, that they have a net worth of more than $1 million, excluding their primary residence.
It’s worth noting that angel investors act on their own will and volition, so this isn’t a prerequisite. The most memorable example of this is Jeff Bezos’ parents investing $250,000 into Amazon in 1995. While they weren’t known for being accredited investors at the time, this has made them some of the wealthiest people in the world.
Notable Examples: Jeff Bezos, Marissa Meyer, Matt Mullenweg
Angel investors tend to have been in business for a lot longer than most founders, and they’re willing to help the venture they invest in. This knowledge can be invaluable to you as a founder and will help to expedite your growth and profits.
Angel investors often don’t expect to see a return on investment for years, and often you don’t need to pay them back unless your startup fails. While they expect there to be an exit plan in place, they’re willing to be patient.
Because you’re giving an angel investor a percentage of your company in return for their investment, there’s always going to be risk involved. If your company starts to fail, and your angel investor thinks you are standing in the way of the company’s growth, there’s the chance they can take control of your company.
Venture capitalists are private equity investors that tend to target the industries that have already demonstrated high growth potential, and their funding is usually handled by a venture capital firm.
Like angel investors, they also provide funding in exchange for an equity stake but typically venture capital investment comes with handing over a higher percentage of the company. However, unlike private investors, you’ll only be able to access funding from venture capital firms once your business is already established and growing.
Unlike with a bank loan or an angel investor, venture capital firms “gamble” on a company’s success. More often than not, capital firms usually won’t chase you for the money they’ve invested.
With this option, you don’t have to wait until your company has made lots of money to grow. With investors from venture capitalist firms, you can take your company to the next level within a short period.
While venture capitalists don’t expect their investment to be paid back, they do expect a big return and may demand the majority share of your business. It then becomes the investor’s venture rather than entirely yours. If you value your independence, then this might not be the best option for you.
Angel investors and venture capitalists are both essential parts in modern business, and taking on working investors can give you the edge you need to make your business successful.
In short, there’s no easy answer to this question. It will wholly depend on what level your startup is at, how much control you want over your company, and whether you’re willing to risk your stake in the company to see your dreams succeed.
I’ve worked with a variety of startups, all of whom I’ve advised different options depending on where they’re at with their business. And, in my honest opinion, it all comes down to what you, as the founder, envision for the future of your business.
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You might also enjoy these popular fundraising-related articles Venture Capital vs Angel Investing for Startups, Venture Capital Advantages and Disadvantages and Startups Fundraising A Practical Guide on the same topic.
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