When looking for funding for small businesses, private investments is often a consideration for entrepreneurs.
While there are many types of private investing, the most common types are venture capital and angel investors. For small business owners considering bringing on investors, knowing the differences between these two key financing options is critical. As seen in the recent article, From Business Concept to Funding: Why Successful Entrepreneurs Think Differently, venture capital and angel investments are just two funding options entrepreneurs need to consider.
What is the difference between venture capital and angel investors? Here are a few of the most common traits of these two investor types and some of the variances.
Angel investors and venture capital funds are both considered equity investors. That is because, in exchange for funding either for start-up or ongoing operations, the investors are seeking an ownership share in the company.
These investments are not loans. There are no repayment plans, interest rates, or schedules by which the money needs to be repaid.
Instead, the investors will receive a negotiated percentage of future profits.
Angel investors are individual investors who have the wealth, investment capacity, and interest in supporting newer companies to succeed. While they are referred to as “angels,” they are still looking to invest in and profit from their insight, advice, and financial commitment to the companies they choose to fund.
Venture capitalists usually work for companies that invest in many different companies and in different industries. The venture capital employees usually manage a pool of funds that are invested in multiple companies to diversify risk and opportunity. Some venture capital firms may choose to specialize in certain industries, such as biotechnology or digital apps. Others may serve a range of industries.
Often, working with angel investors is less complex and more direct. As a general rule, you are communicating with the investor directly, not with many different employees within a venture capital firm.
Angel investors will look at your business model, discuss your business idea and strategic plans, and write you a check, usually after a few meetings. Some angel investors like to stay involved with the company and offer advice or insights. Others are more hands-off and will simply expect to see your financials and their returns.
Venture capital firms are more formal enterprises. You will likely need to submit your business plan and financials and wait to see if you secure an in-person meeting. At that meeting, you will be expected to present your concept and plans, and respond to questions from firm partners and other employees. You may be asked to adjust the plan or demonstrate progress before an investment decision is made.
Angel investors are more likely to invest in the start-up phase of a company’s work, while venture capital companies are usually looking to finance companies that are a bit further along in their development.
Another difference between the two financing models is the amount of funding available. Generally, angel investors are investing smaller amounts of money, often as low as $25,000. Venture capital firms usually are making a $500,000 or larger investment. Venture capital firms also may expect to have some decision-making authority, either through board membership or by placing various executives in the company.
At Benetrends, we offer an alternative to the uncertainty and challenges of seeking equity financing. Benetrends pioneered the use of 401(k) or IRA funds to help entrepreneurs get access to cash without giving up equity. Known as ROBS (Rollover for Business Startups), this innovative program may be the perfect fit for your small business. To learn more, download The Definitive Guide To 401(k)/ROBS Business Funding today.