Many early-stage founders see opportunity everywhere they look, but lack the capital to make it happen.
When you’re starting out, you won’t have a lot of options to finance your business. Traditional lenders like banks like to see a strong track record - or ask you to give up personal guarantees to offset their risk of lending.
That’s why most founders dip into their personal funds or raise money from family and friends to get their business off the ground.
But sometimes you need more capital than that, and that’s when you’ll look to equity financing. If you’ve just started out, you’ll raise seed funding from angel investors that see promise in your idea. Most businesses that have already proved their business model will turn to venture capital investors instead.
Venture Capitalist vs. Angel Investor: What’s the difference?
Venture capitalists are business professionals who invest money into startups on behalf of a risk capital company (they use other people’s money). Angel investors are well-off individuals who invest their own money in a startup venture.
How do venture capital firms fund businesses?
While both venture capitalists and angel investors invest money into companies in hopes of a healthy return on investment (ROI), the term sheets from each investor look very different.
Venture capital firms have considerably more to invest ($9.9 million on average) since their funds are typically pooled from other investment companies, large corporations, and pensions.
Because venture capital investments are larger, there’s also more due diligence involved. Expect investors to deep dive into the company's business model, financials, market, products, management, and operating history, among other things.
Big-ticket venture capital funding typically also requires a bigger stake in your company. In fact, a VC firm will likely own about half your business by the time you exit. That means VCs also have a say in how you run your business, and expect you to hit growth targets each quarter.
If that’s not for you then you could consider revenue-based funding (RBF), where you can get dilution-free investments and pay back a percentage (6-12%) of your future revenue. For example, an ecommerce fashion brand called Hedoine grew revenue 1106% with a $55,000 investment in 2019 that they invested in Facebook and Instagram ads.
How do angel investors fund companies?
On the other hand, an angel investor decides to invest their own funds, but often as part of a network of other angels.
Angel investors assume greater risk, do less due diligence, and don’t exert as much control over how you manage your business. Instead, they put more faith in the founder and founding team. However, they will still have the business knowledge, experience, and connections to help early-stage companies grow.
When does it make sense to partner with a venture capital firm?
One of the challenges of raising business capital is deciding what type of funding is most appropriate for your company. So let’s compare the benefits and drawbacks of angel investing and venture capitalists.
A venture capitalist may be right for you…
- When you’re looking for more significant investments. Venture capitalists can help your company achieve its ambitious growth goals with big-ticket investments.
- When you’re looking to network like no tomorrow. While angel investors are usually well-connected, VC firms naturally have more partners and resources to connect you with to grow your team and customer base.
- When you’re looking for another opinion. VCs will have their say on your company’s strategy, management, and trajectory.
At the same time, you won’t have to repay millions of dollars with no ROI if things go south, since VCs don’t ask for their money back. So if you’re a growing company that needs more funding to reach the major leagues, a venture capitalist firm can help you get there. To get the most out of your investment decisions, start learning from data and take advantage of machine learning in venture capital.
When does it make sense to find angel investors?
An angel investor may be right for you…
- When you’re still building a business case. Founders typically find it easier to get angel investors on board than venture capital investors because angels are more prepared to invest in a company that may not bring a return. Because they take an early piece of the pie, and that grows over time, this can make the investment worthwhile. Often angels will invest in 10s of companies, knowing that many won’t make a return.
- When you’re looking for more control over strategy. Because business angels invest more in the entrepreneur than the viability of the business (which has yet to be proven), they put their confidence in the founder to lead the business and are less likely to be involved in decision-making.
In reality, if you’re looking for equity funding, most of the decision about who to partner with has been made for you. Early stage companies will only be able to secure funding from angels, while later-stage companies need significantly more investment than angel investors can offer, so partner with VCs.
What does a typical venture capital investment look like?
According to Statista, the median size of venture capital deals in 2020 was:
- $1.2 million in seed stage businesses,
- $4.5 million in early-stage businesses,
- and $9.9 million in later-stage businesses
Read more about Statista’s interpretation of different deal sizes here. It’s not particularly helpful to define a business stage by years of trading, because all businesses grow at different speeds.
The above only shows the median. There are a growing number of businesses that receive more than $100m in VC funds that aren’t accurately represented in the chart.
What does a typical angel investment look like?
On the other hand, angel investments vary significantly, but investors typically get together to invest between $100,000 and $1m in total. This can be made up of individual investments between $10k and $100k.
Angel investors mostly focus on early-stage businesses and startup companies that need help getting off the ground. These startups usually don’t have the track record to interest VCs and need capital to move the dial on their product development, marketing, and sales.
Angel investing & venture capital funds: Repayment terms
Whether you are working with venture capitalists or angel investors, you usually won’t need to make repayments because you haven’t taken on debt. However, more businesses are starting to combine equity and debt financing in later-stage VC rounds.
When you sign a deal with either a VC or an angel, you’re handing over some equity in your business, so you’ll make less of a return on investment. Venture capital firms make an average return of 57% per year before the company is sold. However, VC investments are very volatile, so this figure has a standard deviation of about 100% (compared to 10% for most S&P-500 stocks).
Meanwhile, angel investors see anywhere between 20-40% rate of return each year. But if you don’t want to risk giving up a portion of your eCommerce or SaaS business, revenue-based financing offers founder-friendly investments between $10K - $5M for a flat fee - and without the costly dilution.
Angel investment vs VC funding: Which is best?
By now you’ve probably got a clear idea of whether you need venture capital funding or angel investment, based on…
- How much funding you need
- Whether your business has proven it can scale
- Whether you want to give up control of how you run your business
Here’s a quick summary with the main takeaways in case you’re still making your mind up:
Who are they? - VCs pool funds from third parties to finance startups growth.
Ideal for: A growing business that has shown it can cost-effectively acquire repeat customers.
Investment size: $1m - $100m
Who are they? - Angel investors are wealthy individuals who invest their own money into start-ups.
Ideal for: A strong founding team that needs help getting off the ground
Investment size: $50k-$1m total deal size, made up of $10k-$100k investments
A third option: Revenue-based financing with Uncapped
Now you have a solid understanding of what venture capitalists and angel investors have to offer, it’s almost time to start asking for intros.
However, there is another option: revenue-based financing works either in place of, or alongside equity funding to help businesses get the capital they need to grow quickly.
Unlike equity financing, which takes months to close, you can access the funds within 24 hours. Many of our customers use that financing to acquire more customers and get better terms for their next VC round.