One of the most significant difficulties for new businesses is raising the initial funds to operate and grow. It’s a lengthy, scary, perhaps fruitless process. However, the blood, sweat, and tears you shed will be well worth it if your efforts pay off and you can make your ambitions a reality.
Trying to persuade prospective equity investors to participate in your firm may be time-consuming. It usually takes three to four months to close on a round of equity fundraising. Each investment round is likely to need at least that much time.
However, the precise duration may be affected by variables, including the size of the round, the company’s history of success, the importance of certain KPIs, etc. Startup founders must also know that certain fundraising rounds may take longer than others. This may increase the possibility that the business may run out of money before it completes any investment rounds.
It is a good idea to understand the differences between the various types of funding and the types of investors, such as angel investors and venture capitalists, before looking for funding for your business to avoid wasting time. As a business owner, you should also be aware of the benefits that each brings to the table. In this article, we look at the Key differences between Angel Investors, Venture Capitalists, and Series Funding
From Pre-Seed to Crowdfunding: Discover the Right Funding for Your Business
Who are Venture Capitalists?
A venture capitalist, whether an individual or a company, provides crucial capital for startups during their mid-stage growth phase when a lot of funding is required to manage cash flow properly. Venture capitalists generally have a team of analysts who help them decide where to invest money, VCs are also actively involved in managing the businesses they invest in through the board of directors.
The funds acquired by venture capitalists typically originate from various sources, such as pension funds, insurance companies, and affluent individuals. With a discerning eye, venture capitalists tirelessly scour the market to identify businesses with immense growth potential. They possess an inherent appetite for risk, which sets them apart from those who prefer conventional investment avenues like stocks.
Different Stages of Venture Capital Investment
Depending on a company’s stage of development, many forms of venture capital financing may be an option. According to the BVCA, there are four distinct phases of venture capital investment.
- Seed
Funding for the early stages of a company’s creation, including brainstorming, planning, product development (including the creation of prototypes), and market research.
- Start-up
Investment capital is lent to businesses to create and launch new products. Businesses that have just started or have been around for a while may not yet have commercial product sales.
- The Emerging Phase
Companies that have finished the product development phase but lack the necessary capital to launch mass production and sales are eligible for this financing. They may be profitable later.
- Late-stage entrepreneurship
Stable-growth financing is available to enterprises whose expansion rates have decreased relative to their early stages. These businesses may or may not turn a profit, but they have a better chance now than they did before.
- Expansion
Capital donated to a firm already in operation and making money but needs it to continue growing and expanding. This funding might be used for anything from expanding manufacturing capabilities to expanding into new markets or developing new products.
Pros and cons of working with VCs
Pros
- The most apparent benefit of venture capital is the substantial amount of money a company can obtain. As venture capital businesses operate by pooling contributions from several sources, the total value might be very large. Your business may get a substantial infusion of funds, decreasing the likelihood that you will have to go elsewhere for financing.
- Businesses in their infancy are the primary target audience for venture capital. Venture capitalists are more willing to take a chance on these businesses than conventional lenders like banks because of the need for a proven financial record. Venture capitalists are willing to take calculated risks in exchange for potentially large returns.
- In addition to financial backing, venture capital provides entrepreneurs with many other useful resources. Investors in a venture capital fund are looking for a healthy return on their money. That’s why they’ll jump at the chance to assist you in making your business a success.
- The monthly loan installments are a significant deterrent for many businesses. These frequent payments burden resources, necessitating a steady income stream to cover all due obligations. As venture capital relies on equity investment rather than debt, there is no requirement for regular payments.
- Most venture capital companies aim to exit their investments five to seven years after making them. If you do this, your company has a greater chance of succeeding, and your investors will get higher profits. This implies that you will get financial and operational support from your venture capital for a significant amount of time. Venture capitalists may help you expand and fine-tune your business for sustained success.
Cons
- Getting venture finance is difficult because of the approval process. The claimed approval rate at certain companies is as low as 5%. Venture capital businesses will do their homework before investing in you to ensure you’re worth their money. As making money is the primary motivation, they will want evidence that you can guarantee a profit.
- Giving up equity is an inevitable part of raising venture money. Some business owners may need help with this idea. Depending on its maturity, companies may seek a 10% – 80% interest in your business. These financiers deserve a substantial stake in the company. It may be worthwhile to look into the methods that enable you to reclaim company ownership at specific growth points.
- For some startups, the long-term commitment required by venture capital is a deal-breaker, but for others, it’s a huge opportunity. Venture capital may not be ideal if you seek a fast cure or short-term cash to close a financial gap. To attract venture capitalists, you must be willing to part in a significant portion of your firm.
- People may assume that venture capital is inexpensive since no repayments are required. Nevertheless, once you sell your company, you will know how much equity costs you.
- A venture capital firm will back your company if it provides a healthy return for them. Your organisation must meet these expectations by operating effectively and reaching the desired growth targets. If you don’t provide results, the company’s shareholders may vote to replace you, leading to your dismissal.
Who are Angel Investors?
An Angel investor is a wealthy individual willing to invest in new businesses for long-term profit planning. These investors usually invest their money in return for equity ownership or convertible debt. The investment may be for the one time to support the business in the difficult early stages. Angel investors belong to all ages and gender. They could be a retired person, a sportsman, or a fellow entrepreneur. Most angel investors hold excessive money and seek the golden opportunity to invest in the startup from where they could reap profits.
Angel Investors also make mutual networks on online platforms and then invest in new businesses collectively. However, investors always seek a way to protect their money and help build a flourishing business. To safeguard the interest, angel investors follow different ways; for instance, they sometimes offer loans that will be converted into equity once the business has lifted off.
How Do Angel Investors Differ From Other Investors?
Angel investors are wealthy individuals who put money into a company in exchange for a small piece of the firm’s equity to fund the company’s operations. As the money would go to the firm rather than the single proprietor, this option is out of reach for sole traders and partners.
If the venture is successful, the angel investor can cash in on their investment by selling the company. But, if the business fails, the angel investor would suffer a loss. A predetermined plan for when to cash out is thus essential for investments of this kind. The two most typical forms of exit strategy include another firm acquiring the startup and integrating its operations into its own.
Angel Investors Pros And Cons
Pros
- Angel financing is generally available during the earliest “seed” stage of a company’s growth when the founders have the most pressing capital needs.
- Since companies need a history to reassure lenders and limited assets to pledge as collateral, banks are often unwilling to provide loans to startups.
- As you are not accepting a loan but rather trading the angel investment for stock, you will not have to come up with the money to make monthly debt payments, which may be hard for a business yet to produce revenue.
- In contrast to bank loans, angel investment financing does not require the pledge of personal assets (such as a house) as collateral.
- Angel Investors provide them more leeway in bargaining, taking risks, and making swift judgments. Angel investors often need more documentation to onboard than make standard financing choices like bank loans.
- As you will be answerable to other shareholders with the addition of angel investors, you can operate the firm more effectively.
- Most angel investors have already succeeded in business and may use this to help businesses and their founders. They may also introduce you to people who may help you get financial backing and new business partnerships. Angel investors are widespread, creating many intriguing possibilities for financial gain.
Cons
- Angel investors may be an excellent resource for startups, but there is a major drawback: founders may have to give up as much as half of the firm in exchange for funding. This is why it’s crucial to include founder safeguards in the formal investment documentation from the start.
- Angel investing is very dangerous since many new businesses fail, and the investor may lose everything. By asking for the founders’ warranties concerning the firm’s condition when investing, angel investors might seek to limit and decrease their risk by inserting specific safeguards in the investment contracts.
- Angel investors may be a great source of funding for startups, but it can be difficult to find one who is interested in your company, who you can trust, and who is a good match for your company’s culture.
- The drawback of less structure and formality counterbalances the upside of more adaptability. By drafting investment agreements that have been examined and agreed upon by all parties, your legal team will play a crucial role in establishing this formality and structure, which can be relied upon in the future.
- Despite the upsides of more visibility and faster development, angel investors may exert pressure to reach objectives and deliver outcomes rapidly so they may maximize their returns before you depart.
Key issues faced in acquiring Funding and how Angel investors and venture capitalists can help
For every business, finance is the central pillar, whether the business is on a large scale or small. When starting a new business, you may face financial issues at some point and need to look around for the financial source.
Often, founders need help in acquiring funding, and there will be many factors behind it. Some of the possible challenges faced by businesses are explained below:
Uncertainty Problem
New businesses and startups don’t have experience records that lenders can examine to ascertain whether the business will be successful. Therefore, they feel hesitant to lend their money to new companies.
Equity gap
Wealthy investors often look for investment opportunities with more prominent and more attractive firms rather than investing in new businesses. The government of the UK provides an equity finance scheme called Enterprise Capital Funds (ECFs). These are commercial funds that are offered to all types of businesses seeking up to £2 million.
Lack of Exit Route
Investors also look for the exit route of any business. New startups normally don’t offer any easy way to exit because they need finances for the longer term.
Less networking contacts
Vast networking contact is a blessing for new entrepreneurs. If you connect with wealthy individuals, they will be willing to invest in your business. However, starting a business at a young age with less networking contact can take a long to know the market.
Fear of Debts
Getting toppled by debts must be daunting for many new businesses, but careful refund planning can be an excellent way to handle the capital issue in the early stages.
Poor Payment History
Before investing in any business, investors look at the reports of any business’s past payments to make sure your worthiness of payback is on time. If founders have a good history, it will be easier for them to get approved by the investor.
Angel investors and Venture Capitalists are likely risk-takers willing to invest in businesses in exchange for profits. However, both entities have different ways of investing money. Angel investors prefer to invest in new firms, and venture capitalists always look for established businesses to reduce the risk of losing money. Both the investors take an active role and bring their consultants and advisors to provide an effective way of growing a company. If a business shows its performance, an angel investor might sell his shares to a Venture capitalist firm. On the other hand, venture capitalists make good exit strategies for investments. Venture capitalists would sell their shares back to the company if the company is making profits.
The Level of Contribution and Involvement Angel Investors and Venture Capitalists have
You have to meet no fixed amount to become an Angel Investor, but the average investment an angel investor makes is around £10,000 to £250,000. Angel Investors make relatively fewer investments.
Venture capitalists invest mainly in mature companies and are seen as risk-takers because not all investments return a profit. Out of 10, if one investment enters a good profit section, it can cover all losses and bring healthy returns. On average, Venture Capitalists invest around £250,000 to £4 million. Investments can go even higher, depending on the potential of the business.
Investment duration of Angel Investment and Venture Capitalists
Before taking any investment from angel investors, as a founder, you must provide them with an exit strategy because they will always be looking for one. Angel investors will wait many years, but they should be compensated accordingly.
Most venture capitalists invest through firms that create and manage their assets. The average period of the fund is around 8 to 12 years in which they not only invest but also take the vast profits and exit from the investments.
From where do Angel Investors and Venture Capitalists get money?
Angel investors are mostly wealthy individuals and have different ways of income sources. On the other hand, venture capital is mainly gained from wealthy individuals’ involvement, pension funds, and various foundations.
What is Series Funding?
Series funding is the process through which your firm seeks funding from outside investors to expand its operations considerably. Venture capital funds are professional investment companies that fund early-stage enterprises and are common outside investors.
These investors will provide capital in return for equity in your business. There are several ramifications of a series funding round since the investors in that round will effectively become shareholders. Bringing on series funding investors will reduce your participation in daily operations and other crucial matters.
Types of Series Funding
Series financing, as its name implies, consists of many capital rounds. If your firm accomplishes its growth goals, the investors in each round will likely put money into the following stages:
Pre-seed Funding (also known as bootstrapping)
Pre-seed funding is the starting point of Funding, where you collect the initial amount for the investment. Mainly, the founder is the leading investor in this position. Apart from the founder, friends and family support you financially. These people typically don’t demand any equity in exchange for investment. If your network is strong enough, you might also involve venture capitalists and angel investors, but it rarely happens.
Seed Funding
Seed funding is the initial round where capital is raised in return for equity. The investment is the seed money required to take the business off the ground; this is a highly risky investment as most businesses fail within this phase of their lifecycle. Promising entrepreneurs are well aware of the high failure rates and work accordingly. The average amount invested in seed funding is anywhere from £350,000 to £1.5 million. It is essential to understand that other factors will be involved, and you will determine your targets and then achieve them accordingly. Generally, Angel Investors are involved in this high-risk round and therefore demand a lot of equity in return for the risk.
Series A Funding
Series A investment is the first round of investor money for a company. Investors in this series of investments look for startups with a proven business model and strong early results. To raise capital, you must persuade stakeholders that lack of liquidity is the only real barrier to expansion. Hence, it’s clear that more than great ideas is needed.
Series B Funding
Series B financing is geared toward expanding your company’s operations past the startup phase and into the mid-market.
At this point in your company’s fundraising, you can utilise the money to boost sales, advertising, and technology and hire more people. The investors in a Series B round of fundraising often mirror those in the Series A round. On the other hand, venture capital organisations that typically back only well-established businesses could be interested in investing in your company.
Series C Funding And Beyond
Series C capital is typically reserved for mature businesses with a proven track record in their industry. In most cases, these funds are utilised for:
- Needs more resources to develop a product further;
- Increase presence in the existing market; or
- Integrate or purchase into another business.
In other words, Series C financing aims to help a mature business expand. Creating synergies is one possible motivation for acquisitions or mergers, which such investments may fund. When two businesses in the same industry or supply chain combine, this is called synergy since the combined entity is more efficient.
More investors may be involved in a Series C investment round compared to prior rounds. Due to the reduced risk associated with your company operations, private equity funds, investment banks, hedge funds, and private equity companies may be interested in investing alongside traditional VC firms.
Lastly, a firm might raise more money by applying for Series D or E funding. This standard method convinces investors to put money into a company’s grand plan. Having an initial public offering (IPO) where anybody may purchase your firm shares is often the final aim.
Pros And Cons of Series Funding
Pros
- Series A capital is crucial for laying the groundwork for a business, which is essential for getting off to a fast and successful start.
- Series B capital is a tipping point in evaluating whether or not a firm will survive the long haul since most businesses die within five years owing to a lack of finance. It’s a transitional investment that allows a company to continue operating until it can sustain itself via revenue after establishing itself in its market.
- As your firm reaches Series C, many investors will pay attention to it. You will have plenty of support through financial opportunities or public and media interest. People will know your company by name and look to you as a leader in the industry.
Cons
- Loss of control is a major downside that will be present across all forms of financing. Accepting series.
- Capital makes investors part owners of your business. There will be more work, more people to manage, and more people with different ideas about where the firm should go. A lot of responsibility may become overwhelming if not managed properly.
- The risk of complacency is cited as a disadvantage of Series B. You no longer feel the need to raise more capital since the flood of investment has met all of your financial demands.
- A CEO or senior team may be pulled several ways after receiving a Series C investment. It will be up to the management to maintain perspective, appease the stakeholders, and keep the team on course.
Key Similarities between Angel Investors and Venture Capitalists
Investors, either angel investors or venture capitalists, get a portion of the business after investing in a business. It means that you give away part of ownership in your business.
Angel investors and Venture capitalists may also have a strong network of similar people and can introduce them to you. Apart from that, these people have business experiences that could benefit your business.
Key Differences between an Angel Investor and Venture Capitalists.
- Angel investors are people with a lot of money who invest money in startups. In contrast, venture capitalists work with venture capital firms, which are professional and organised firms that take the money and invest in profitable businesses after thorough investigation.
- Both invest different amounts of money in their businesses. Generally, Angel investors invest around £25,000 to £250,000, which can be more or less. On the other side, venture capital firms invest huge amounts of money, around £250,000 to £4 million or even more.
- Angel investors mainly provide financial help to businesses. If a company wishes or allows it, angel investors can give valuable advice and contact some important people regarding investment with you. Unlike Venture capitalists, Angel investors generally don’t get a seat on the board and take decisions on behalf of the company.
- Since Venture Capitalists work with a firm, the venture capital firm identifies a strong company with an expert team and the potential for high growth. Venture capitalists make sure businesses flourish by helping them in developing strong strategies.
- Venture capital firms look into every aspect of due diligence, and after complete research, they decide if investing money will benefit them. However, Angel investors don’t go into this depth and make a quick decision based on interest.
- Angel investors mainly invest in the early stages of startup and help them in the running during the initial stages. Venture Capitalists hardly show interest in startups unless they give a clear business plan with the possibility of growth.
How Can One Find Angel Investors and Venture Capitalists to Raise Investment for Their Business?
You will find plenty of investors around you, but you must be active enough to identify them. Some communities are built for investors, where they regularly participate in various business events to find potential opportunities. These investors are constantly looking for high-value and profitable business models to invest in. If your accountants specialise in a certain niche, you might ask them to introduce you to other businesses that have successfully achieved raising investment. Such as, Technology Companies should seek out a Tech Accounting Firm, Lawyers should seek out Accounting Firms that specialise in Professional Services and so on and so forth.
Conclusion
In conclusion, raising funds for a business is challenging, but it can be a crucial step toward achieving growth and success. Both angel investors and venture capitalists play significant roles in providing capital to startups and businesses at different stages of development. Angel investors, typically wealthy individuals, invest in new businesses and provide financial support, expertise, and networking opportunities. On the other hand, venture capitalists, operating through venture capital firms, invest in established businesses with high growth potential and actively participate in managing the companies they invest in.
While both angel investors and venture capitalists offer financial backing, they differ in investment amounts, level of involvement, and decision-making authority. Angel investors invest smaller amounts, have a more personal approach, and may not demand a seat on the board. In contrast, venture capitalists invest larger amounts, conduct thorough due diligence, and often take an active role in managing the business as part of the board of directors.
Securing funding from either angel investors or venture capitalists requires entrepreneurs to demonstrate their potential and develop an effective business plan. It is essential to understand the pros and cons of each funding source, including the potential loss of control and equity. Startups should carefully evaluate their needs and objectives before seeking investment and consider which type of investor aligns best with their goals.
Entrepreneurs can explore various avenues to find angel investors and venture capitalists, such as attending networking events, joining startup communities, leveraging online platforms, and seeking referrals from industry professionals. Building strong relationships and demonstrating the value proposition of their business are crucial steps in attracting potential investors.
Overall, the journey of raising funds for a business can be arduous. Still, with perseverance, a compelling business plan, and a thorough understanding of the investor landscape, entrepreneurs can increase their chances of securing the necessary capital to fuel their growth and turn their ambitions into reality.
