There are three main sources to obtain funding when starting a new business. If you don’t quality for a bank loan, the two other most popular ways to obtain capital, i.e., funds, are through Angel Investors and Venture Capitalists (VCs). These two funding options are similar yet different. An entrepreneur who appreciates these differences will be able to make an informed decision on which funding option will work best for their business.
Angel Investors are individuals that are looking for a higher return than they can earn in traditional markets so they put their money into non-traditional investments, such as start-up businesses. Most Angel Investors will invest large amounts of Capital into businesses that they have experience in or industries that they like. They can then use their expertise to help the business succeed.
VCs are investors that also invest large amounts of money into businesses. The main difference between Angel Investors and VCs is that Angel Investors will typically invest into start-up companies while VCs will invest in established companies. Both VCs and Angel Investors look to invest in businesses in which they can get at least a 25% return on their investment.
The amount of money an Angel Investor invests is much smaller than the funds invested by a VC. Angel Investors tend to invest less than $150,000. In return for their investment, they often want to to participate in managing the company. Because VCs invest in already established companies, generally they will not try to manage the company. However, VCs will invest $1,000,000 or more. If the business fails to perform as expected, the VC might require significant changes of the management team.
For a company to receive Venture Capital, they will need proof that they are an established and successful company. To get funding from Angel Investors, you need an idea and a good business plan. In general, it is easier for a company to receive funding from Angel Investors. Once the business is established and has proven successful, it is possible to receive additional funding via a Venture Capitalist.
Keep in mind that the money you might receive from an Angel Investor or VC is expensive, with required returns starting around 20-25 percent. Also, they might want to exercise their power to manage or dictate who will be the members of your management team. The best advice is to do your homework and make sure the investor or VC group is a good fit for your business as well as your personality.