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 comapre two of the most popular types of business funding: angel investing vs. venture capital (VC).
What is angel investing?
Angel investing happens when an angel investor—usually a high net worth individual—invests a large amount of money, or capital, into a business during its initial stages. This capital injection is typically paid back through equity in the business, or convertible debt. In the U.S, an angel investor is an accredited investor, meaning they have a net worth of at least $1M or an annual income of at least $300K.
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 all 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!
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 where VCs work as a group, 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”.
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 $100K-$250K USD, while a VC investment sits between around $2M-$40M USD.
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 taking 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.
When should you seek out angel investing vs. venture capital?
In short, an angel investor is better for startups and very early stage companies while venture capital is better suited for emerging companies with a more established track record of success.
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 like AngelList which help connect early stage entrepreneurs with angel investors.
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 own network, assuming you’re connected with at least a couple high-net-worth individuals. You’ve also likely heard of crowdfunding on websites like 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.
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.