For businesses, one of the priority points across the board is funding. On that note, angel investors and venture capitalists are two notable choices. Which to choose? Learn here.
Who are Venture Capitalists?
Venture capitalists are individual investors with a penchant for investing in companies. Or they are members of accredited financial institutions, like investment banks. They provide financing to companies like SMBs and startups. This is after checking if they have long-term profit potential.
Typically, venture capitalists provide all necessary support to the organization, from financial capital to talent acquisition. Besides providing such help, venture capitalists influence strategy planning as well.
Ways Venture Capitalists are Better than Angel Investors
Here are the benefits:
- Venture capitalists are highly experienced, skilled, and knowledgeable in the field of their choice. Plus, they keep track of changing trends in the financial markets. So, businesses taking funding from venture capitalists also get suitable mentoring and networking support.
- These investors help companies they believe have the potential for higher growth in the market. For this, they generally invest the capital at the expansion or growth stage, totaling more than $1,000,000.
- You will get access to various resources and utilities in your specific sector, like state-of-the-art technologies and equipment.
Possible Struggles of Depending on Venture Capitalists
The drawbacks of venture capitalists for businesses include:
- Since venture capitalists provide a high amount of capital to companies, they also want a higher level of control or equity in the organization. These investor types expect high ROI for the investment.
- They only invest in a company once they have a suitable exit strategy in place first, like an IPO. So, businesses that take venture capital must fulfill the terms of the deal to continue receiving help.
Who are Angel Investors?
HNWIs (High Net Worth Individuals) have a lot of capital at hand. Some turn to investing in things like new startups with a promising future. They are called angel investors. Often, these seed investors are friends or family members of the company owner. They put their money into the business after getting a percentage of ownership equity.
These investors are not conventionally in the corporate investment field. So, they do not see the fund allocation purely from a business perspective. Instead, they invest in the “idea” or “vision” of the entrepreneur.
Ways Angel Investors are Better than Venture Capitals
Advantages include:
- Angel investors can partner with other individual investors to pool their funding. Then, they provide that as capital for the business. In this case, the total fund amount can increase if all investors provide generous amounts individually.
- These investors mainly invest in a company because they like the idea at the inception level or because of personal connections. So, in many cases, they are open-minded about negotiating more flexible and personalized term loans, investment funds, trusts, etc.
- They have little interest in the potential ROI of the company as a priority and bypass asking for traditional debt financing.
Possible Struggles of Depending on Angel Investors
The disadvantages of pursuing angel investors are:
- Regarding the available principal, angel investors do not put high amounts of funding into the business. Typically, the amount they invest is around $10,000 to $150,000. The highest the quantity can go is around $1,000,000, but that is in rare cases.
- Since they provide the investment directly, they can set personalized deal terms. For example, they can ask for a board seat or a managerial position in the company. Besides that, some private investors may also want control over product development.
Which Businesses are they Best for?
Both types of investors provide funding for small-to-medium businesses or startups. However, angel investors primarily focus on the entrepreneur and invest in their idea’s potential. Alternatively, VCs look for companies with solid management, a distinct USP, and profitable marketability.
Also, angel investors mainly focus on startups in the tech industry but are entering other sectors. On the other hand, venture capitalists focus on businesses in rapidly expanding industries, like the IT sector.
Is there a Potential Debt Risk?
Since corporate financing involves a lot of money, the possibility of incurring potential debt is a worry for entrepreneurs looking into these investment methods. That is especially true for startups or small businesses looking to expand.
To note, angel investors do not deal with debt financing directly. They typically only ask for ownership equity or convertible debt. So, there is no pressure to pay off the whole outstanding balance. However, you may risk losing complete creative/administrative control or the choice for alternate financing if the angel investors say so.
On the other hand, VCs do not force you to repay the total amount they finance in exchange for equity ownership. Yet, if you also take additional venture debt after getting VC funding, that can cause debt issues.
You must pay off the debt balance with interest regardless of whether or not the business makes a significant profit. In case of defaulting on the business lines of credit, there is the risk of bankruptcy or seizure of assets. So, proceed cautiously when you choose your funding option.
Alternatives to Venture Capital Loans and Angel Investors
While relying on venture capitalists or angel investors assures high cash into the startup, entrepreneurs have to lose complete ownership control. Thus, many business owners consider bootstrapping initiatives to fund their startups instead. These alternatives include:
- Business Lines of Credit: The lender checks the creditworthiness of the entrepreneur to see if it is high. Then, they provide a limited line of credit for all business expenses.
- SBA Loans: Government-sponsored loans at low-interest rates and generous repayment terms. These suit people with high credit scores and good financial history.
- Business Credit Cards: A business credit card allows staff members to pay for expenses via one credit card with an undefined limit and high-interest rates.
- Personal Loans: Business owners can take unsecured personal loans directly from lenders at reduced interest rates with a set repayment period.
Each alternative funding source mentioned here assures benefits like consistent cash flow and total creative control for the entrepreneurs. However, there are high risks of self-financing, like working with limited resources, more pressure against better-funded competitors, etc. Plus, options like business credit cards come with high-interest rates.
Since options like business credit cards or personal loans are unsecured financing, the debtor is fully liable to pay off the debt if the startup fails. Here, he or she can take the help of reliable credit counselors and sign up for a debt management plan. The credit counselor may also provide adequate advice on managing debt. Plus, you can even improve your credit score with such a program.
Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.
