When will a Venture Capitalist or Angel funder Invest in Your company
Entrepreneurs are inherently big dreamers. Most of the time, these individuals are aware that in order to get their start-up in the multimillion range they might look to partner with an interested investor. Investors come in different forms such as banks, personal investors, and peer to peer lenders. However, amongst the entrepreneur community, it is common to see angel investors and venture capitalists driving the economic development of start-ups outside of banks.
It might seem a little nerve-wracking knowing that an individual or firm is providing significant funding in hopes of growing your business at least 10 times the initial size. However, it is also exciting to take your business to the next level from its “pre-seed” stage.
It is important to define which investor you want to approach when seeking funding to elevate your venture. It is uncommon for an angel investor or VC firm to approach entrepreneurs, so it is the job of the entrepreneur to find these investors. This article will provide you the advantages/disadvantages of partnering with a VC firm or an angel investor, in addition to where you can find these investors.
Partnering with a Venture Capitalist Firm
Venture Capitalist firms exist to develop entrepreneurial endeavors through significant amounts of funding, in hopes of getting a large return on investment. VC firms have substantially more funding power than angel investors since their money comes from a group fund and can also be provided by LPs (limited partners.) In addition to their large investing power, VCs are also well-connected and have access to several resources and assets that your startup might need. VCs want to see their investment pay off, so inherently they will give entrepreneurs the tools to scale their business.
The pressure VC firms place on their partnered entrepreneurs is a disadvantage if seeking their investment. VCs will always be looking for a profitable exit for themselves, whether it be when your startup gets acquired, becomes an IPO, or at the very least, breaks even. Additionally, venture capitalists want to own equity in your company, which means some ownership must be given up to these firms. In extreme cases, if the VC owns 50% majority shares then they have control of management in your startup.
According to a 2019 report by Statista, the median amount of funding a VC provides to a startup in its seed phase is $1.7 million dollars. Comparatively, in Series A funding, VCs invest on average $10.3 million dollars. In both cases, since VCs know there is a large risk investing in start-ups since the National Venture Capital Association estimates, 25% to 30% of venture-backed businesses fail and the invested money is lost. Thus, the firm looks at startups with the potential to 10x its initial investment in order to attain a high ROI. VCs are all about “go big or go home.”
Partnering with an Angel Investor
Similarly like VCs, angel investors are individuals who look to invest into a startup that demonstrates the potential for a large ROI. However, angel investors are different as they are wealthy individuals that have achieved their money through successful start-up ventures of their own, inherited family money, or are retired and looking to contribute to an industry’s economic growth.
These accredited investors are termed as “angels” because they take a significantly larger risk than banks and typically invest during the pre-seeding phase. Angel investors do not need to be paid back and generally do not require collateral, so in order for them to invest, they must really be drawn to the founder’s ambition and vision of the business’s future. High net worth individuals typically become angel investors because of their passion in entrepreneurship and being part of something bigger than them.
A major advantage for entrepreneurs partnering with angel investors is that it’s not as risky for these business owners compared to the enormous risk the investor takes on. Of course, no entrepreneur wants to fail the expectations of their supporters, but knowing that they are not entitled to pay off debts to their angel investor surely provides peace of mind.
Another advantage of angel investors is that they are usually experts in the industry the startup is operating in. Thus, these successful individuals can offer their expertise to entrepreneurs in order to stimulate the growth of the start up. Valuable and personable advice to young entrepreneurs can accelerate their growth and progression towards their goals.
A disadvantage of partnering with an angel investor is that they hope to have a say in your startup’s future. Since they own equity of your company, they will tend to act upon their ownership and sometimes challenge your decisions of what steps your company needs to take. Another disadvantage is that an angel investor’s average investment deal is $500,000. This doesn’t mean they can’t invest larger amounts, but compared to the VC industry, angel investors do not have the same amount of capital as the multimillion-dollar funds accessible to VCs.
Where to Find These Investors
Both VC firms and angel investors will always be willing to hear your pitch. These two investment groups share an interest in helping develop entrepreneurs and hopefully be a part of the next Facebook or Google.
Questions to ask yourself if you are ready for an investor to step in and exponentially grow your business are:
- Am I ready to lose some ownership and control of my company?
- Is my company lucrative enough for these investors to take a chance on my company?
- Will I accept the advice of my investors even though it might conflict with my vision?
- Do I have an exit plan to leave my venture in eight years?
Remember the reasons why a VC firm or angel investor would want to partner with you in the first place. VC firms want to work with scalable businesses that can double, triple, or quadruple the money on their investment. That’s why these firms tend to be heavily involved in the technology industry, due to the growth potential and profitability of this sector inhibits.
Angel investors look to make a significant return on investment as well, but since their funding is lower than VCs they expect to make a profitable return but not massive. Angels tend to seek out the challenge and thrill of helping grow a business, which typically is in an industry they have a lot of knowledge in. These investors want to have shared values between them and the start-up’s founder and team, to establish a collaborative partnership.
Both VC firms and angel investors, ultimately hope to see a liquidity event of the startup. This means that the investors want to cash out on their investment if the startup is acquired, IPOs, merges with a corporation, or another event that allows them to gain money from their ownership shares.
If you are confident and eager to partner with an investor, then you will be relieved to know that they can be found in the right places online. However, always practice due diligence when looking for the right investor for your business. This will be a person or firm that will integrate themselves as a large part of your business and ultimately, your life.
A list of venture capital firms will pop up as soon as you search up “VCs near me” on Google. However, renowned VC firms are prominently found in New York, San Francisco, and Los Angeles, due to a large amount of entrepreneurial activity in these economic hubs. Useful venture capital databases are:
- The National Venture Capital Association http://www.nvca.org
- Small Business Investment Company https://www.sba.gov/funding-programs/investment-capital
- Gust https://gust.com/
Angel investors are seasoned entrepreneurs that might be well within your network. Ask friends and family if they know of any angel investors they can refer you to. Referrals, like in any aspect of business, are important to establish credibility for angels to listen to your pitch and potentially partner with you. Angel investors can also be found in these online databases:
- Angel Capital Association https://www.angelcapitalassociation.org/
- Angel Resource Institute https://www.angelresourceinstitute.org/
- New York Angels https://www.newyorkangels.com/
As you look to scale your business and grow your company to its full potential, it is important to carefully choose who you are going to trust with your future. The truth is that the funding resources are out there, so there must be a meticulous decision process centered on who you will be comfortable partnering with. Regardless of who ends up as your investor, it is up to you, the business owner, to put in the work to achieve both yours and your partner’s goals.
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