If you’ve spent any time here on the website, you know what most business people are searching for: funding. Sure, we all want to achieve success and fulfilled by doing what we love, however the best way businesses can perform that is with use of capital.
Of course, you could hit up the local bank or credit union, look at different companies the net for online lenders, or launch a crowdfunding campaign. But why limit you to ultimately these options when you can attract investors that bring capital, industry experience, and a whole lot to assist your startup business grow.
Whether your startup has already been showing signs of success or perhaps your business is still just a arrange for the future, if you’re thinking about how investors can help you take your business to the next level, this article is for you. In this post, we’re concentrating on two kinds of investors: venture capitalists and private investors.
It doesn’t matter if you have a little bit of knowledge about these investors, or you’ve only heard them mentioned in news articles. This informative article breaks down the definition of each, explores the differences forwards and backwards, as well as offers strategies for how to pick the best choice to suit your business’s needs. So sit back, relax, and let’s begin.
What Are Vc's?
A venture capitalist is definitely an investor or firm that gives businesses the cash they have to grow from the fund — a pool of money from multiple people. Unlike a conventional loan, this capital doesn’t get repaid on the set schedule. Instead, the investor receives equity in the company — in other words, ownership working. We’ll explore equity and just what this means a little later.
Venture capitalists typically purchase businesses that have high growth potential. Businesses that receive capital from venture capitalists should be poised to maneuver quickly to grow and expand. Most often, companies that are funded by vc's already are somewhat established.
What Are Angel Investors?
An angel investor is a little bit not the same as a venture capitalist. An angel investor is definitely an individual (or perhaps in some cases, a group of people) that is well-off and wants to invest in a business in exchange for equity or convertible debt. The invested capital doesn’t come from a fund but instead comes from the angel investor.
Angel investors also typically gravitate toward companies rich in growth potential. However, angel investors tend to be more willing to take on higher-risk businesses, such as startups and early-stage businesses.
Angel Investors VS Vc's: Key Differences
Are you still scratching your head? Let’s break down the definitions of private investors and venture capitalists, then take a look at the key differences forwards and backwards.
The Investors
When you work with a venture capitalist, you'll make use of a venture capital firm or employee of a investment capital firm. This individual or group uses a pooled fund to provide businesses with capital. The pool could include funds from corporations, university endowments, pension funds, and/or other big investors.
If you work with an angel investor, you will receive capital from the successful, wealthy individual or even a group of well-off individuals. This money doesn’t come from a fund but rather comes from the individual or group. In other words, they're utilizing their own money, not someone else’s.
Angel investors aren't required to be accredited, however, many are, which means that they either earned $200,000 each year during the last several years or have a net worth exceeding $1 million.
Types Of Businesses
Venture capitalists provide capital to businesses rich in growth potential. These businesses happen to be in a position to grow quite rapidly and also have already shown past success. These firms can be in a variety of industries, from food startups to up-and-coming technology.
Angel investors, on the other hand, are more prepared to work with businesses within their very early stages. When a business has utilized other ways of funding, for example friends and family, small company loans, or crowdfunding, it might opt to seek capital from an angel investor before working with a venture capitalist.
Angel investors typically purchase companies that they are familiar with. Someone who made their cash off software or real estate, for instance, could be more apt to invest in a new software company or real estate venture.
The Investment
Another big difference between vc's and private investors is when much they're willing to invest.
One thing to note would be that the amount invested varies based on a number of factors, so these are merely a few averages to provide you with a much better understanding of which kind of capital every type of investor would like to invest.
Venture capitalists invest a much higher amount of cash — think huge amount of money. On the flip side, angel investors are more conservative, investing, on average, about $25,000 to $100,000 per company.
Equity & Convertible Debt
Whether you obtain capital from a venture capitalist or perhaps an angel investor, the repayment terms are different from other forms of economic funding (for example loans). Loans and contours of credit are kinds of debt financing. Which means the business repays the cash it borrowed as well as fees and interest assigned through the lender.
Capital received from vc's and angel investors is known as equity financing. Instead of repaying borrowed funds, the investor receives an ownership stake in the industry. This means the investor is eligible for a share of the profits and can also cover the cost of important decisions concerning the business.
How much equity exactly? Well, it depends on multiple factors, including the quantity of an investment and the expected return. To get a general idea, venture capitalists may expect equity from 10% to 80%. That’s a really large range, however, you will find multiple things to consider, and each deal differs.
Angel investors generally expect equity of 20% to 50%. Although this can be quite a large share of ownership, the reason is that investors tend to be more likely to take on riskier businesses in very initial phases.
While both types of investors are repaid through equity, there's one minor distinction between the 2. In some cases, a borrowing agreement with an angel investor may include convertible debt. Convertible debt is debt that may later be transformed into equity — ownership in the business — at another time as decided through the investor and the borrower.
Now, what happens when the business isn’t successful? Are you required to pay back the investment made in your company? The good news is that no, you won’t necessarily be responsible for repaying your investors. However, the investors could liquidate your business and collect all or a portion of their investment if your business fails.
Beyond Capital
One of the most popular advantages of having an angel investor or venture capitalist back your business is that you can obtain not only capital. While the resources open to you vary based on your industry and the investor you work with, your investor may have ways that might help fuel growth and improve your odds for achievement.
In addition to the capital you’ll receive from a venture capitalist, these investors will also help you build industry connections or even find use of other causes of funding.
Angel investors — specially those that stick with what they know — can often serve as mentors. An investor that made millions in real estate, for instance, can teach the ins and outs of the business, share industry secrets along with you, and help your real-estate-focused company grow.
Which Is Best For My Startup Financing Needs?
Are you ready to bring your startup one stage further by searching for a trader? Before you do, understand which kind of investor is best for your company. Know the needs of your business, understand what to consider, and you’ll be ready to take the next thing toward getting funding.
Look For Investment capital If…
- Your business has accessed other financial resources, including family and friends, crowdfunding, along with other kinds of funding
- Your clients are at least somewhat established and is poised to develop once you have secured an investor
- Your clients are very innovative and/or has high growth potential
- Your business needs a large amount of capital — for instance, $1 million or perhaps more
- Your business is positioned to see a lot of growth and profit that’s worth investing in
- You’re prepared to quit equity and control in your business
Look For Angel Investing If…
- You’ve used some savings, but you’re not yet ready for venture capital
- Your business is new or perhaps in the early stages
- Your small business a reduced amount of capital to grow
- You’re ready to quit equity and/or take on convertible debt
- In addition to capital, you would like your investor to bring industry experience and data towards the table
Learn Much more about Angel & VC Funding
Still undecided on which road to take? Or perhaps you would like to know more about these two forms of alternative funding. If so, check out our other great resources about angel investors and vc's. Just like any other type of economic funding, make sure to seek information, explore all options, and weigh out the pros and cons. Best of luck!
