Hi, I’m Bette Hochberger, CPA, CGMA. For today’s business quickie, we will be discussing the difference between venture capitalists and angel investors so that you can decide which investor best suits your business.
It’s essential to remember that Venture Capitalists (VCs) are not the same as a bank loan; when a company takes on a VC investment, they are essentially taking on a partner. The VC investment is usually traded for a 40% preferred-equity ownership position. This can be a pro or a con depending on the kind of support your business needs; in order to take on this kind of investor, I would suggest finding an investor you trust. Venture capitalists are generally a part of larger companies and typically invest using pooled money from their firms – think pension funds, etc. Venture capitalists usually invest in already established businesses to reduce risk, so VCs are probably not the right fit for you if you are a start-up. VCs invest more money than angel investors, averaging $11.7 million. So, do your research and come prepared with your business plan and key performance indicators (KPIs). Get with your accountant before meeting with the VC of your choice, and make sure to review your financial statements and decide how much capital you should be seeking.
Angel Investors, unlike VCs, are accredited individuals who use their own money to invest in small businesses and start-ups. Typically, angel investors take on more risk than VCs and invest earlier. So, if you’re a start-up and don’t have much of a proven track record yet, consider an angel investor. Angel Investors, just like VCs, are not to be confused with a bank loan; they will want equity in your business. The average angel investment amount is $333,000, so their equity is likely to be less than a VC. However, because angel investors are individuals, they often act as mentors to the entrepreneurs they assist. This level of support can be good or bad, the good being that they can help you network with established professionals and assist in business decisions. The bad is when you don’t agree on what business approach to take. So, before making hasty decisions, ask yourself what you are looking for in an investor and compare your options.
Anyway, that’s all I have for today’s business quickie. Let me know what you think in the comments and drop a suggestion or any business content you would like to learn about more.