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Make the right choice: Venture capitalist vs Angel investor

There is nothing as frustrating as having an excellent business idea but lacking the capital to get it off the ground. Traditional business lenders such as banks require a strong credit score, or evidence of a financial track record that newer businesses may not have. They may even request personal guarantees to offset risk.

For this reason, many start-ups and SMBs turn to alternative funding sources. Two of the most prominent options include venture capitalists and angel investors. In this article, we’ll answer the questions what is a venture capitalist? What are angel investors? How do they differ? And how do entrepreneurs select the right small business funding options?

Understanding venture capitalists and angel investors

Venture capitalists are individuals or groups that specifically invest money in start-ups and SMBs, usually operating as a fund for investment. They are generally attracted by the growth potential of small businesses, which offsets the higher-risk strategy of investing in untried and untested organizations. Some venture capitalists or funds specialize in one area or sector, for example, technology or AI, and use their knowledge base to identify potentially rewarding investments. Other venture capitalists have a broader portfolio of investments.

After a successful initial investment, venture capitalists may buy the business outright or, in the event of an initial public offering (IPO), a large number of shares.

Angel investors, by contrast, are individuals who choose to invest in a business using their own capital, either individually or as part of a team of angels. They make investments in exchange for equity, providing both funding as well as their time, expertise, and network of contacts. The investment horizon of an angel investor tends to be long, and while they may also negotiate voting privileges or seats on the board, they usually exert less control over their investment than venture capitalists.

What are the differences between angel investors and venture capitalists?

Although similar, there are some fundamental differences between venture capitalists and angel investors. These can broadly be categorized as follows:

  • Status: Angel investors tend to be high-net-worth individuals but can work as part of a team. Venture capitalists are generally more institutional, working as part of a venture capital fund dedicated to identifying potentially successful investment opportunities.
  • Investment size: Angel investments tend to be smaller, less than $1 million. Venture capital investments are on the larger side, generally more than $1 million, and sometimes substantially more.
  • Involvement stage: Angel investors usually get on board at an earlier stage of the business development, either at the pre-seed or seed stage. Venture capitalists come in at the Series-A stage or later.
  • Size of equity: As angel investors come in at an earlier stage, they tend to offer smaller investment amounts. They typically ask for between 5% and 30% of the business equity. Venture capitalists, with larger funding power, generally secure between 10% and 80%. Of course, this depends on the individual circumstances of each business and opportunity.
  • Other interests: Angel investors may ask for minimal voting rights but will generally act in an advisory capacity. Venture capitalists usually require operational voting power to have more control over their investment.

Depending on the individual investment requirements of the business and the stage in its development, it may be more suitable to procure either angel investment or venture capital. Angel investors may be the better option for those still building a business case or want to retain more control over their business strategy. This is generally at the earlier stage when the advice and guidance of an experienced angel will also be particularly useful. Venture capital may be more suitable when businesses are looking for more significant investment, can benefit from networking and business contacts, or when advice is required at a more strategic level.

Pitching to angel investors vs. venture capitalists

Angel investors may be more interested in a great idea, team, or attitude than the immediate potential profit (although this will always be a consideration of any investment). This is why finding the right angel investor to pitch to is so crucial. Try to identify angel investors who specialize in the specific area of business where the business operates. Develop a compelling sales pitch and try to sell the narrative to any potential investor by accurately and passionately describing the company’s vision and showcasing the possibilities.

Understanding how to pitch to a venture capitalist may involve a slightly different approach. They need to believe that the business’ offering can solve an existing problem or need in the marketplace. Present the business as the solution to what its customers need. This should be backed up by a watertight business plan and both actual and projected figures. Project incomes in both the short and long term and also demonstrate an understanding of the barriers to entry for the competition, such as proprietary technology or copyrighted materials. It’s also important to honestly address any perceived shortcomings and areas for development, as well as highlight how venture capitalists can assist in progressing to the next level of opportunity.

Selecting the right funding option for the business’ needs

An assessment of startup costs and finances will help establish whether the business is better positioned for either angel investment or venture capital. Next, it is time to develop strategies for securing the right kind of investors. Selecting the right path for business growth is fundamental for securing the type of investment needed. If there is any incongruity between the type of investment asked for and the people who can offer it, then this can be a major stumbling block.

Entrepreneurs can find angel investors by attending networking events, attracting interest on social media, or getting involved with investment networks. To increase networking opportunities, founders should talk with fellow business owners or compete in start-up events or pitch competitions. To secure venture capital investment, entrepreneurs need a comprehensive business plan and a strong management team in place. They should be able to demonstrate milestones and business traction and be actively cultivating investor relationships through their network.

If they plan on working with multiple investors, entrepreneurs need to ensure that investors’ requirements and interests are aligned with their own. They should be wary of diluting their ownership percentage too much or relinquishing too much control over the business. Additionally, they should ensure that reporting and governance are in place and functioning correctly.

Angels or venture capitalists: Making the right choice

Establishing whether the business is better positioned for angel investment or venture capital is just the first stage of the process. This involves making sure an accurate assessment of the company’s investment needs has been carried out, including factors such as the levels of equity the business owners are prepared to give up, their immediate and long-term business needs, and the levels of experience and contacts any investors could potentially bring.

Once complete, it is time to start targeting the right investors and developing a pitch strategy that chimes with their needs and requirements. Using the financial services available at PayPal can help businesses achieve their investment goals and secure a successful future.

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