When an entrepreneur thinks of capital funding, the first thing that comes to mind is venture capital. However, depending on the stage and growth plans of the new company, an entrepreneur may be better suited to pursue an angel investor.
Many venture capitalists receive proposals for capital financing from companies that just do not meet their requirements for scaling, industry, or funding amounts. This happens frequently when entrepreneurs fail to properly research the role or expectation of a VC firm in comparison to an angel investor.
An angel investor is an individual or private company that may wish to invest capital into new businesses that need help getting off the ground. A previously successful entrepreneur may become an angel investor as a way to help new entrepreneurs get past the self-funded stage. Typically, angel investors will fund companies that need financing in amounts anywhere between $150,000 and $1.5 million. Though angel investors are easier to acquire than VC, they still require higher return amounts than traditional bank loans.
Venture Capitalist vs. Angel Investor
How can you, as an entrepreneur and business owner looking for capital growth, know which investor to approach? Here are some guidelines:
Type of company
Venture capitalists have a preference for certain industries, particularly those with high growth, such as biotechnology or software with large expansion potential. Though angel investors like high growth industries as well, they are more apt to be a capital source for other smaller growth industries.
Size of company
The growth potential of the company is a tremendous factor in VC funding decisions. They expect big returns when a startup company goes national or global, is acquired by a major corporation, or offers an IPO as a larger corporation. Angel investors, however, will look at smaller companies that do not require as much capital for initial startup or capital growth.
VC firms are notorious for picking and choosing startup companies that are lead by experienced entrepreneurs. Experience may be within the industry they are entering or through other successful entrepreneurial ventures. Angel investors, on the other hand, will more likely help a first-time entrepreneur.
Amount of capital needed
Whether you need only one round of capital financing or a series of rounds, if you need more than $3 million for your capital needs, you should seek VC funding. VC firms will usually not consider startup or small companies needing less than $1 million, unless the VC firm specializes in seed capital for startups.
Generally, if the total capital required to create a positive cash flow in just a few years is less than $3 million, an angel investor is the way to go.
If you are an entrepreneur who wants to get an innovative business off the ground with a capital inflow, consider your options carefully. Think of how big you want to take your business, your experience, and your ultimate capital financial needs. You may find that a VC firm is not what you’re looking for after all.