Just as cash comes in different denominations, the money that funds your start-up can come from many different sources. You can invest money from your own pocket (“bootstrapping”) and you can lean on your friends and family to buy into your dream. But things can get more complicated when you seek capital from folks you don’t see at backyard barbeques or Thanksgiving.
Learn how to identify the differences between Angel Investors and VC firms, and which is right for your startup.
Early stage businesses need to know what to look for and where to look when reaching beyond their inner circle for cash. This begins by understanding the distinctions between the kinds of investors who are willing to risk significant sums of money on a young and unproven enterprise.
Crowdfunding aside, there are two primary sources of early-stage capital for start-ups: venture capital (VC) firms and angel investors. VCs and angels may all have the same goal—to make money from their investment—but there are big distinctions between the two:
VC vs. Angel Investor Funding
Venture Capital
- Who they are: VC firms are usually companies that manage and invest other investors’ funds. They are often limited partnerships with general partners who direct the investments.
- When they invest: VCs usually are not interested in early-stage and unproven companies. Rather, they look for more mature businesses that may require larger amounts of capital to bring them to market.
- What they look for: VCs want to see positive cash flow, large growth potential, a sound business plan, and proven ideas and strategy that have already seen some success in the marketplace.
- What they expect in return: VCs will expect to be involved in the company’s management to some degree. In addition to their equity stake, they likely will require a seat on the board and be more vocal in how the company is run.
Angel Investors
- Who they are: Angels are high-net worth individuals (usually with a net worth of well over $1,000,000) who are investing their own money. Sometimes, a small group of angel investors may pool their money to make larger investments.
- When they invest: If friends and family invest at the idea stage, and VCs invest closer to the launch stage, angels usually invest at the “beta” stage in a company’s development. They may invest in seed rounds for companies that need relatively modest amounts of cash to launch but which also present more risk than more mature companies.
- What they look for: While VCs must do significantly more due diligence before investing (since they owe a fiduciary duty to their partners), angels may decide to jump in simply based on the strength of the idea, their confidence in company management, or other more speculative metrics.
- What they expect in return: Angel investors may or may not want a seat on the board or a role in management. They may play an active role by bringing contacts, resources, or their own skills to the company.
Here in Chicago, there are abundant sources of funding from venture capital firms and angel investors. But before you look to them to take your business to the next level, look at your company’s needs, goals, and development arc. That will determine where you should focus your efforts.