It can seem impossible for you to secure the funding you need to get your business off the ground as a startup. However, angel investors and venture capitalists could offer a beneficial solution. Here’s what you need to know about angel investors and venture capitalists:
What Is an Angel Investor?
An angel investor is an investor that provides new businesses with funds out of their own pockets in exchange for equity or convertible debt. Technically anyone with funds can be considered an angel investor, but there’s still an accreditation process that habitual angel investors can undergo.
According to the Securities Exchange Commission (SEC), angel investors must have annual earnings over $200,000 per year for the past two years with a strong likelihood of similar earnings in the future. They must also have a net worth of at least $1 million.
Pros and Cons of Working With an Angel Investor
There are both pros and cons to working with an angel investor. Here’s what you need to know to make the best decision for your business:
Pros
- Since angel investors are in charge of their own money, they’re able to make riskier investments. As an entrepreneur, this is a good thing. Although you may not be able to get funding from traditional sources like banks with strict requirements, angel investors may be willing and able to provide you with the funding you need.
- The money that you get from an angel investor isn’t considered a loan that you’ll have to pay back. As a result, you won’t be on the hook for repayment if your business fails.
- Angel investors come with knowledge and experience that you can use to your advantage. So not only are you benefitting from the money provided by an angel investor, but you can also benefit from their input. For instance, many new businesses struggle with shopping cart abandonment, marketing, and customer service. However, an angel investor can help you tackle these issues head-on since they’ve likely dealt with them before.
Cons
- Angel investors like to pay the high risk, high reward game. So even though they’re willing to take a risk by investing in a new business, they often expect a high rate of return.
- Even though the money you get from an angel investor isn’t a loan, strings are attached. In exchange for funding, you often have to give up a specific amount of equity in your business. Depending on the amount of the investment, you could end up losing a lot of control and money.
- Many entrepreneurs take this route to control their own destiny. However, with an angel investor involved, you may have less control than you’d like over your own business. It can be frustrating to feel accountable to someone because of investment.
What Is a Venture Capitalist?
A venture capitalist is an individual or group that invests money into more established startup businesses. Even though these startups are more established, it’s still a risky game. However, venture capitalists believe that earning big rewards often requires that you take big risks. In exchange for their investment, venture capitalists are given equity in the company.
At the same time, they often provide valuable business insights based on their previous investment experiences. After some time, the venture capitalists may choose to buy the entire company or a large number of its shares if it goes public.
Pros and Cons of Working With a Venture Capitalist
There are both pros and cons to working with a venture capitalist. Here’s what you need to know to make an informed decision for your business:
Pros
- Venture capitalists often come with valuable connections in the business world that you can potentially tap into. Think of it as a form of networking that could come in handy in the future.
- Venture capitalists also often come with leadership experience, collaboration opportunities, and hiring assistance. All of these qualities can be invaluable when you’re trying to build a business.
- Venture capital funding doesn’t require set monthly payments. So instead of worrying about being able to swing these payments when you’re just starting, you can focus on investing in areas that will help grow your business.
Cons
- It can be difficult to secure venture capital funding if you’re a brand new business trying to get off the ground. Instead, venture capitalists prefer to invest in more established and proven businesses.
- While venture capital funding can be valuable, it can also be distracting for entrepreneurs. Instead of focusing on other business areas, entrepreneurs often spend all of their time and effort looking for venture capitalists.
- Venture capital sounds too good to be true, and while it is possible, it’s not easy. Venture capitalists aren’t too keen to give up their money to just anyone. As a result, it can be difficult and time-intensive to obtain venture capital.
Which Option Is Best for Your Business?
Working with an angel investor might be best if…
- You’re very early on in your business journey and cannot back your pitch up with numbers and data.
- You don’t have a concrete plan for growth within your industry, and your numbers aren’t certain.
- You don’t necessarily need a large investment to promote growth and achieve your business goals.
On the other hand, working with a venture capitalist might be best if…
- You have spent time, money, and effort developing your business, and you have a legitimate valuation.
- Since you have spent time, money, and effort developing your business, you have data supporting your growth and success thus far.
- You are okay with giving up equity in exchange for investment and are willing to negotiate to find numbers that work for both sides.
How to Find Investors for Your Business?
Finding investors for your business can be challenging if you don’t know where to look. Here are some different avenues you should consider:
Family and Friends
Sometimes the angel investor you’ve been looking for is right in front of you in the form of a friend or a family member. Discuss your business idea with friends and family members. If any seem excited or interested in your concept, go ahead and make your pitch! It never hurts to ask.
Angel Investor Websites
The best place to find angel investors is online. There are tons of websites out there dedicated to helping you find angel investors. The best websites include:
- AngelList
- Life Science Angels
- Tech Coast Angels
- Angel Capital Association
- Angel Investment Network
- SeedInvest
- Gust
- Funded
- Envestors
- Golden Seeds LLC
Feel free to browse through some of these websites — you might just find the perfect angel investor!
Venture Capitalists
The best place to find venture capitalists is through the National Venture Capital Association. This trade association provides directories of venture capital organizations for you to check out. In addition, they have online resources designed to help you fund and run your business. They even host events that you can attend to learn more about the investment process.
How to Successfully Pitch to Potential Investors?
Once you’ve found a potential investor — whether they’re an angel investor or a venture capitalist — you need to make your pitch to earn their investment. This can be incredibly intimidating if you’re new to the game. Here are some tips to help you come up with the perfect pitch and nail it every time:
- Before you pitch to an investor, you need to know who you’re talking to. Research the potential investor and learn more about their background and interests so that you can tailor your pitch accordingly.
- The odds are that your potential investor loves numbers. As a result, your pitch needs to be backed up with the data to help make an informed decision. Make sure to include relevant data points, including valuations, price points, current debts, etc.
- That being said, numbers aren’t everything. You also need to tell the story of your business to pique their interest from the start. Talk about how you came up with the idea, where you came from, and how you got to your current position.
- Put all of this information into a concise yet informative presentation with plenty of visual representation. This presentation shouldn’t be longer than ten slides long — including a basic business blueprint. After all, you want to show the potential investor that you value their time.
- Make a realistic ask. Finally, you need to ask the potential investor for a specific amount of money. Tell them what they will get out of the investment and how you’re going to use the funds.
Wrap Up on Angel Investors and Venture Capitalists
While it’s possible to secure funding for your business through angel investors and venture capitalists, it’s certainly not easy, and it often comes at a cost. And while these investors can provide you with helpful business insights, you can look elsewhere for valuable expertise.
For instance, Greg Gillman has helped his clients generate $4 billion in annual revenue thanks to his experience in omnichannel growth strategies.
Sources:
Angel Investors vs. Venture Capitalists | Business.com
10 Venture Capital Advantages & Disadvantages | Fit Small Business
13 Tips on How to Deliver a Pitch Investors Simply Can’t Turn Down | Entrepreneur
