Angel investing vs. venture capital: What’s best?
December 10, 2021
As your business grows, you’ll be faced with many important decisions and challenges, one of them being when and how to fundraise. Talk to any entrepreneur, and you’ll hear them say that raising capital is both one of the most important—and one of the most daunting—factors in scaling a business.
Part of the challenge of raising business capital is figuring out what type of funding makes the most sense for your business. In reality, the best type of funding for your business will depend on its size and growth stage. Let’s compare two of the most popular types of business funding: angel investing vs. venture capital (VC).
What is angel investing?
Angel investing is when a high net-worth individual (angel investor) invests in a growing business. An angel investor is accredited, meaning they have a net worthfootnote 1 of at least $1M or an annual income of at least $200K. Angel investing happens when an investor invests a large amount of money, or capital, into a business during its early stages. This capital injection is typically paid back through equity in the venture or convertible debt.
The benefits of working with an angel investor
As a business founder, you typically take on very little risk when you receive an angel investment. If your business fails, you don’t have to pay your angel back, although some angel investors could have clauses in their contacts, so it’s important to review this before taking funding.
While this isn’t true of all angel investors, many angel investors are founders themselves, which opens the door to an abundance of invaluable knowledge. Beyond this, almost all angel investors—save for those who inherited their wealth—have had very successful careers to reach their personal wealth milestones. Most angels are happy to offer their advice and mentorship to the entrepreneurs they’ve funded—after all, your success is their success!
There's no hard-and-fast rule to the length of investment from an angel investor, however, it's suggested that angels look to invest for a short period of around two to five years.
The drawbacks of working with an angel investor
Because angel investors usually invest in earlier stage—and therefore riskier—companies, they’ll often want a bigger piece of the pie. That means you may have to fork over more equity, which means retaining less control over your company.
Angel investors operate as an individual whereas VCs work as a group of investors, which can be seen as both a pro and a con. Because angel investors operate on their own, you’re not necessarily unlocking the door to a team who can help you scale your business. On the flip side, a VC firm may want more input on how to run your business, leaving you with “too many cooks in the kitchen”.
How to find and connect with an angel investor
Now for the hard part: connecting with an angel investor.
To begin, know whom you're looking for. To avoid partnering with the wrong investor, do your research when looking—find an experienced investor, and look for an investor who’s also an experienced entrepreneur. You want to ensure your angel knows your industry well, as they’ll likely provide you with some useful startup advice. Once you've identified someone of interest, investigate who's in their portfolio and any investment criteria they may have.
Much like seeking a VC to partner with, finding an angel investor is really about who you know. Peer inside your professional network, you may find a referral amongst your personal connections. Check out this goldmine of video advice on how to find and cold-email angel investors:
Once you've identified a few different possible investors, check to see if you have any referrals that can set up a warm introduction. If you don't have any connections, request a meeting via cold email or social media outreach.
It's important to focus on relationship building when approaching angel investors. Seedrs Limited suggests asking for advice rather than asking for money. If you get the chance to meet with an angel, look for opportunities to talk about your business story, the problem your business solves, and what have you've achieved thus far.
What is venture capital?
Venture capital is a form of equity financing where a VC firm—or group of investors—invests in an early stage or emerging company in exchange for an equity stake in the company.
The benefits of working with a venture capital firm
VC firms invest a significantly larger amount of money than the typical angel investor. This is due in part to the fact that angel investors usually invest in earlier-stage companies than VC firms. An angel investment will usually sit between $15K-250K USDfootnote 2, while a VC investment can range from $2M-$4B USDfootnote 3.
As with angel investors, VC firms usually won’t come for the money if your business fails, making it an appealing option for entrepreneurs.
Network, network, network
While angel investors are individuals, VC firms are a group of investors, which expands your network and reach. VC firms also tend to have great connections from other investors and industry executives to agencies and other companies they’ve invested in.
The drawbacks of working with a venture capital firm
VC firms often require a controlling stake in your company, meaning that you lose full control of the business you’ve built. This can result in you no longer being in the driver’s seat of your company, opening you up to the opinions and decisions of the venture capitalists with whom you’re working.
Because you’re making an investment from a group of investors, you’ll have more people to answer to. While VC firms tend to be on the same page, you’re opening your business up to more opinions and ideas, leading to that “too many cooks in the kitchen” scenario you avoid with angel investors.
How to pitch and get in touch with venture capitalists
Finding and reaching the right VC firms involves research, making a connection, and pitching. Look for VC firms that fund companies in your industry that are at a similar funding stage as your business.
Alternatively, you can sign up with Clearco for free to get data-driven insights about your industry, identify investors, and seamlessly connect with funding partners.
Once you build a shortlist of possible VC partners, research each firm. Pay close attention to each firm's ethos as well as the past deals they've funded. You can also reverse-engineer this research by looking for businesses similar to yours and identifying their funding sources.
When it's time to connect with a VC firm, see if you can get an introduction from someone you know. Like with referral programs, it's easier to build trust when vouched for by a trusted source. Go deep within your network—think of connections with access to large amounts of capital like doctors, lawyers, or business brokers.
You can also go the cold-pitch route. Send an email outlining critical information about your company, your current successes, and attention-grabbing stats like high revenue growth. Be direct and concise in your email and be prepared to answer questions about your numbers, revenue, and more.
If rejected, take it as a learning opportunity. Perhaps that particular firm wasn't the right fit. Maybe you need to take a closer look at the strengths and weaknesses of your business. Get feedback from the firm so you can improve future pitches and find success.
When should you seek out venture capital investors vs. angel investors?
If you’re still developing your product or service or don’t have a track record of success that dates back several months, you’re probably better-suited pitching to angel investors. At this stage in your business, you’re probably not quite ready to receive $1M+ in funding and are open to receiving mentorship and advice from an angel. Luckily for you, there are communities that help connect early-stage entrepreneurs with coaches and other founders.
If your product or service is already on the market and you’ve got a proven track record of success for at least several months—or even years—you’re probably best-suited pitching to VC firms. Especially if you need millions to reach your scaling goals and want to tap into an extensive network, venture capital is likely your best bet.
What are your alternatives?
If angel investing and venture capital still don’t sound quite right for your business, fret not! There are many options out on the market for small businesses, and a variety of both non-equity and equity financing options out there.
Some options, like friends and family financing, are sitting right in front of you. Securing funding can be as easy as reaching out to your network, assuming you’re connected with at least a couple of high-net-worth individuals. You’ve also likely heard of crowdfunding on websites like our partners at Indiegogo, which allows the public to pre-order your product or service at a discount, helping fund your growing business.
Other options may not come to mind at first, like microloans and microfinancing, which can offer small businesses up to $35K to fuel growth. Vendor financing is also a newer concept that’s been taking the market by storm, allowing business owners to “buy now, pay later” for certain subscriptions.
Finally, we’d be remiss if we didn’t mention our own suite of funding products covering e-commerce investing.
Regardless of where you are in your founder journey, there’s a financing option for every business—from small businesses to more developed, medium-sized companies. Whether it’s the more traditional routes of angel investors and VC firms to the more modern tech-driven solutions, you’ll find something that works for your business. If you remain persistent in your search for funding, you’ll find something that works perfectly for you and your business.
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