The need for capital funding can come at any stage in a business’s life.
Startups are the most common topic of discussion when it comes to the need for seed money to move forward with the business. However, established businesses need funding for various reasons too, ranging from needing capital to expand or even to keep a failing business afloat.
The trouble in all funding scenarios comes when every bank in town has turned you down, or you just don’t have the credit and/or ability to pay back what you need to borrow in the time they can allot.
When banks aren’t an option and you don’t have any private investors eager to write you a check, the choice comes down to seeking out either an angel investor or a venture capital firm to fund your business’s financial needs. Both come with their own unique pros and cons.
So which is better? It all comes down to your needs, combined with just how much of your business and/or future profits you’re willing to part with.
Let’s take a look at what each type of investor is, and the benefits/drawbacks of doing business with them:
Four-Hour magnate, Tim Ferriss, is a well known angel who primarily funds startups that interest him. Though he himself is a rather wealthy man, angels don’t have to be.
Many make less than $200k and are the types of people who want to invest some of their precious cash, but prefer to have a little more control over where their money is going than the stock, bond, or tumultuous real estate markets offer.
Read both the pros and cons before deciding these folks are just what your company needs to push forward. They’re a “unique” type of investor.
- Angels are great for startups – They can be encouraged to invest based on a “gut” feeling. Investments can be as low as $20,000 and range up to $2-million.
- Angels aren’t hard to find – They may even live right next door to you, or your children may share a class with theirs. Your local Chamber of Commerce are likely to offer a list of viable investors if you approach them.
- Due diligence is usually quick – Since they’re usually investing in you and their belief in you, the D.D. process is typically quick and the check will come in the form of a lump sum investment.
- Angels expect you to make them money – Lots and lots of money. Remember, they could easily invest their money in stocks or mutual funds and make 2 – 12% over several years. They want to see 20% or more from their investment in you, which makes for a lot of pressure including incessant phone calls when things aren’t going as planned.
- Angels don’t like risk – Who does, right? They aren’t likely to cut you another check, unless you’ve formed an airtight relationship with them. Even then, it’s hard to count on them to hang in for sustained growth, even if your first foray together paid out big time for them.
- Angels are control freaks – They’re not billionaire VCs with no-limit Amex cards. Angels want to make an excellent ROI on their money and they’ll not hesitate to offer their advice, even demand you follow it, in order to get their return.
Venture capitalists rarely work alone. They usually own or are a part of a large investment group. VCs will invest in startups, but usually have a long list of data they require before dipping their pen in the ink.
They often invest hundreds of millions a year and usually expect to have a leadership or consulting role in the management of the companies they invest in. Other than larger pocketbooks, the biggest distinction between VCs and angels is that VCs are in it for the long haul – including wanting an equity stake in the company.
- VCs are usually rolling in dough – They’ll invest anywhere from $500,000 to $5 million. Sometimes much more if you have a highly viable and proven concept.
- They’re more knowledgeable, have more access to knowledge and are in it for the long haul – Since they’ll usually want some stake in the company, venture capitalists have more of an interest in seeing you grow your business to its maximum potential and are more than willing to open up their Rolodex for you.
- Money hangs out with money – The rich and wealthy usually hive together in droves. If they stumble on a great idea that needs more money, they’ll have friends waiting in the wings ready-and-willing to cut you a check.
- Venture capitalists want even more of an ROI – They just disguise it well since they’ll generally ask for a seemingly small equity stake in the company with scheduled payouts, rather than requiring you pay them back in one or several lump sums (with interest) like an Angel would. 5 – 20% of your company can add up over the years!
- VCs take their time with D.D. – Due diligence can take weeks, but usually months. If you need money right away, this can be a definite deterrent.
- They never go away – Where an angel will happily offer a short-term loan and disappear once they’ve got it back, the VC will want an equity stake in the company. An unseasoned business owner desperate for financing may soon regret making the deal when they’re still cutting their financier a check for a cut of the profits a decade down the road.
So which should you go with?
If you’re looking for a small investment under $200,000 – or you have profit projections that will allow you to pay back a half or $1-million loan quickly; an angel is probably your best option. For larger loans, above $1-million, you’ll likely need to take on the services of a VC.
However, sadly there’s never an easy answer to this question. You have to carefully weigh the pros and cons of each type of investor, then compare those pros and cons with the type of capital you need.