Welcome to our blog, where we explore the exciting world of startup funding and investment! In this post, we will delve into the difference between two popular forms of startup financing: angel investment and venture capital.
Both angel investors and venture capitalists provide capital to early-stage startups, but there are significant differences between the two approaches. Understanding these differences can be critical for entrepreneurs seeking funding and navigating the startup ecosystem.
Whether you are an entrepreneur looking to raise capital or an investor considering these options, this post will provide valuable insights into the nuances of angel investment and venture capital. So, let’s dive in and explore these two forms of startup financing in more detail.
Angel investors are a critical source of funding for UK startups, with an estimated £850m per year invested by these individuals. Essentially, an angel investor is a person who injects their own capital into the growth of a small business at an early stage, often offering valuable advice and business experience as well. These investors can be wealthy individuals who are passionate about your product, a group of angels who pool their resources to support startups or even a close friend or family member who wants to contribute to your venture.
Angel investors operate independently, making their own decisions about whether to invest in a particular business. In exchange for providing personal equity, they receive shares in the company. The amount invested can vary, with some angels contributing a small sum to help get a startup off the ground, while others may invest larger amounts.
While angel investors can offer valuable insight and advice, it’s important to remember that their primary role is not to build up your company. Instead, they provide financial support and strategic guidance to help your business achieve its goals. In this post, we’ll explore the key differences between angel investors and venture capitalists, and offer tips on how to secure angel funding for your startup.
Venture capital funding is at a whole other level. For a start, rather than individual investors, winning venture capital usually involves a whole firm – investors, board members, and people whose job is to generally help your business develop. Venture capital firms are made up of professional investors, and their money comes from a variety of sources – corporations and individuals, private and public pension funds, and foundations.
Those who invest money in venture capital funds are called ‘limited partners’; those managing the fund and working with individual companies are called ‘general partners’, and these are the people who work with the startup to ensure that it’s developing.
The job of venture capital firms is to find businesses with high growth potential. The firm takes shares and has a say in the future of the company and its running, and in exchange for their involvement venture capitalist firms expect a high return on investment. After a period of time, often years, the venture capitalists sell shares in the company back to the owners or through an initial public offering, hopefully making much more than what they put in.
Venture capital usually deals with very large amounts of money – rather than seed funding, it can be multi-million deals. And while more and more startups are winning venture capital investment, with the sums involved and the risk of investing in a startup, businesses a bit further down the line might be more likely to gain the trust and money of venture capitalists.
Key differences between angel investment and VC investment
Angel investors will put in a variety of amounts, but as it’s generally seed funding you’re not looking at the kind of figures that VC investment deals with. As a general rule, groups of angel investors might go as high as £1 million – but VC firms are unlikely to invest less than £1 million. Because so much time and effort goes into brokering a VC deal, it needs to be worth the company’s while.
While the concept of too much funding might seem ridiculous to cash-strapped startups, with great funding comes great expectations, which is a lot of pressure to put on a fledgling business. You have obligations to your investors, and the overvaluation of your startup can have serious consequences down the line.
Who they invest in
Angel investors specialize in early-stage businesses, while VC firms are generally more unwilling to invest in startups unless they show really compelling promise and growth potential (though this is changing as the startup scene continues to flourish). While incredibly exciting startups in key industries might be able to win VC funding with a little track record, most businesses will have to demonstrate that they can walk the walk, not just talk the talk.
Angel investors might have valuable advice for you, but ultimately they can be as hands-on or hands-off as you want. They will have equity in your business but will not have a seat on your board – unlike with VC investment. Agreeing to VC investment means committing to bringing more people into how your business, people who have a say in how it’s run and whose job it is to help your business reach its potential. While this can be a huge positive, if you’re at an early stage it might be overkill, and you might not have the flexibility to pivot or change focus – too many cooks can spoil the broth, so to speak.
VC firms need to evaluate their involvement with you – due diligence, research, and all the other aspects that help them decide if investing in you is a smart business decision that will see them reap a big return. This all takes time. On the other hand, angel investors can make quick decisions, as they’re often working alone or have a personal interest in the business.
The job of VC firms is to find the best businesses, help them, and then make a lot of money. For angel investors, their motivations might be different – to help less experienced businesses within their sector, for example (though making a return on investment is also a factor, of course!)