When it comes to investing in a company, there are various types of equity investors, and understanding what each means is better for your business. It not only helps you determine which type of investor you want to pursue but also how to best pitch your business model in order to gain their interest. In this blog, we’ll specifically explore the question of what is an angel investor vs. venture capital so you understand what these can mean when preparing to manage your cap table.
What is an Angel Investor?
An angel investor is a single person or group who invests his or her own money into an early-stage startup, receiving equity or convertible debt in return. They are able to invest where and how they want, present less risk for the borrower, and generally have ample business knowledge. Some angel investors are accredited by the U.S. Securities and Exchange Commission (SEC), meaning they meet one of two criteria:
- Have an annual earnings of at least $200,000 per year for the past two years with strong likelihood of similar earnings in the near future; if filing taxes jointly with a spouse, required earnings increase to $300,000.
- Have a total net worth of at least $1 million, regardless of marriage and tax filing status.
Working with an accredited angel investor is not required, but it is recommended to ensure their credibility. In general, an angel investor is great to have in your portfolio, but they do require a large stake in your business which means you will have less control over how you manage it. In most cases, they may share some business expertise – which can be quite welcome in a startup – but for the most part, will be content with receiving equity stake for their contributed funds.
What is a Venture Capitalist?
Where angel investors are generally the first to invest, venture capitalists would step in later during fundraising. A venture capitalist is an individual or group that invests in typically more high-risk startups. Those who decide to invest venture capital will generally form a firm or company where outside investors would invest in the firm, which in turn would invest in the business. Specifically, the role of a venture capitalist is to guide the pooled funds into profitable investments for those investors in order to help the business grow. Over time, venture capital investors may completely purchase a company or own a large number of its shares. Because of their ability to make larger investments, venture capitalists can supply startups with large investment sums, present low risk to entrepreneurs, and provide ample knowledge and connections.
Unfortunately, accepting venture capital means the entrepreneur has less management control over the business, and they often require controlling interest that will remove you from a full leadership role.
Key Differences of Angel Investors and Venture Capitalists
Although angel investors and venture capitalists are both quite common and similar in some ways, there are some key differences between the two.
- Angel investors work alone. Venture capitalists are part of a company or firm.
- Angel investors invest on average between $25,000 to $100,000 of their own money as an individual, or over $750,000 as part of a group of angels. Venture capitalists invest on average $7 million into a company.
- Angel investors primarily offer financial support without obligation to provide business advice; they may be involved as much or as little as they would like. Venture capital is focused on building a successful company, so they will be more involved in the company’s strategic focus and senior management, essentially as the sounding board for CEOs.
- Angel investors will only invest in early-stage businesses to fund technical development and early market entry. Venture capitalists can invest in either the early stage or into a more developed company depending on the growth focus of their venture capital firm.
- Angel investors may or may not perform their due diligence before deciding to invest. Venture capitalists have a fiduciary responsibility to uphold and will put quite a bit of their resources toward researching a business before deciding to invest.
Approaching the Right Investor for Your Business
Although both an angel investor and venture capitalist offer your business funds to use towards growth, but that doesn’t mean you should pursue whichever option you want. It’s essential to consider your business model, where your company is at, and what you are going to be comfortable with welcoming into your company. So, what exactly are the key factors in determining which investor is right for your business?
New businesses that are still building are better suited for angel investors. They understand that not every business they invest in will generate a positive return for them, but they are willing to take the risk early so when and if growth does happen, their return will, as well. An angel investor will also leave more company control to you and for the most part, stay out of any decision-making.
Larger companies that require a much more significant investment can have angel investors, but more than likely, they will want to pursue venture capital funding. They also offer more business connections through their own partners and resources that can help your team and customer base grow exponentially. Venture capital firms will also offer their thoughts regularly and will have a say in the company’s strategy, management, and trajectory, making them more of a hands-on partner.
Pitching Your Business for Investment
When you determine which investor you want to pursue, you’ll want to know how to pitch your business to them in a way that will garner their interest and get them to invest. Because of their differences, there’s a specific approach you need to take when pitching to angel investors versus pitching to venture capital firms.
Pitching to Angel Investors
Angel investors will be interested in hearing about your business ideas rather than focusing so much on profit potential. Here’s how to find the most success when pitching to an angel investor:
- Find an angel investor that specializes in your specific product or industry
- Create a compelling sales pitch that highlights what makes your business a winning gamble, as well as presents key factors like market size, product or service offerings, competitors and what they’re doing wrong, and, if possible, the amount of your current sales
- Accurately tell your story in a way that ties into emotion and showcases how you got your initial idea and proved the concept
- Be descriptive about your vision for the business to help them visualize the possibilities using visual media or physical product mockups
Pitching to Venture Capitalists
Unlike angel investors, venture capitalists are focused more on the numbers as they want to ensure that what they invest in will give them a positive return. If your business needs venture capital funding, here’s how to pitch your business for greater success:
- Show how what you have to offer solves a common problem for consumers, plus how many customers need that solution
- Presenting an accurate four-year projection of income and expenses that will show the venture capitalists that long-term investment mitigates short-term risk
- Demonstrate significant barriers to entry, such as proprietary technology, copyright, and patent protection, that make it more difficult for well-capitalized companies to copy your business model and steal market share
- Share the growth potential of your business and explain how you will scale operations to meet demand
- Be honest about areas the company is lacking as it will allow the venture capitalists to understand how they are able to contribute to the company should they decide to invest
- Keep trying – one “no” does not mean you’re out of luck. Simply improve upon your pitch before moving on to the next
Understanding Repayment Terms
Whether you work with an angel investor or venture capitalist, there’s not necessarily any repayment to make since you haven’t actually taken on debt. What these do take, however, is a return on the investment or portion of your business. Angel investors usually see roughly a 20-40% rate of return every year, whereas a venture capitalist would receive an average yearly return of 57% before a company is sold.
Easily Manage Investments with Comprehensive Software
Whether you have angel investors or venture capitalists invest in your company, its important to accurately manage the information through a capitalization table, or cap table. Rather than leave your cap table management’s accuracy at risk using an Excel document, make it easier with comprehensive software like you’ll find from Astrella. Contact our team today to schedule a demo to discover how our cap table management software can work for your business.