If you’ve found that the high street banks are saying no, there are other options available for you to raise finance. Whether you are starting a new business or expanding your current business, it’s an exciting time! However, one of the most significant challenges that you may face is securing the initial funds required to get your business off the ground and propel it to the heights of greatness, or for the expansion of your existing business into new areas or markets.
Securing funding for your startup or expansion plans can be a time-consuming and often daunting process and typically takes 3 or 4 months. There are various options available to raise alternate funds and in this article we will look at the pros and cons of two of the most common ones:
- Venture Capitalists; and
- Angel Investors.
Before embarking on the journey to secure funding for your business, it’s crucial to understand the differences between various types of funding and the types of investors involved. Armed with this knowledge you’ll be able to make informed decisions that will set your business on the path to success.
Who Are Venture Capitalists?
Venture Capitalists (VCs) play a pivotal role in financing startups during their mid-stage growth phase when substantial funding is required to manage cash flow effectively. VCs typically have teams of analysts who assess potential investments and actively engage in managing the businesses they invest in through board representation.
VCs source their funds from various entities, including pension funds, insurance companies, and high-net-worth individuals. What sets VCs apart is their appetite for risk, making them more inclined toward unconventional investment avenues like startups, rather than traditional investments such as stocks.
Pros and Cons of Working with VCs:
Pros:
1. VCs offer substantial funding, normally ranging from £250k – £5m, reducing the need to seek financing elsewhere.
2. They are more inclined to take risks on early-stage businesses, providing crucial support.
3. VCs bring resources and expertise beyond financial backing.
4. Unlike traditional loans, venture capital does not require regular repayments.
5. VCs aim to exit investments in 5-7 years, providing long-term support.
Cons:
1. The approval process for VC funding can be challenging, with low acceptance rates.
2. Founders may need to give up a significant portion of equity.
3. Long-term commitment and loss of control can be drawbacks.
4. The true cost of equity becomes apparent upon exit.
5. Shareholders may vote to replace the founders if expected results are not achieved.
Who Are Angel Investors?
Angel Investors are wealthy individuals who invest in new businesses for long-term profit potential. Typically they invest between £10,000 to £250,000, and make relatively fewer investments. They often provide funds in exchange for equity ownership or convertible debt.
Angel investors come from various backgrounds, including retirees, athletes, and entrepreneurs. Angel investors primarily invest in early-stage startups and have more flexibility in their investment decisions compared to institutions. They provide critical capital when founders need it most, often without the need for a proven financial track record. Unlike venture capitalists, (is there something missing here?)
Angel Investors: Pros and Cons:
Pros:
1. Angel financing is available during the critical seed stage.
2. It doesn’t require a proven financial history or personal collateral.
3. Angel investors provide more flexibility and adaptability.
4. Angel investors typically do not seek board representation.
5. Angel investors often bring networking, mentorship and connections.
Cons:
1. Founders may need to give up a significant equity stake.
2. The risk of startup failure can result in losses for angel investors.
3. Finding the right angel investor can be challenging.
4. Less formality may lead to misunderstandings without proper documentation.
5. Investors may exert pressure to meet objectives quickly.
Both angel investors and venture capitalists take risks, but they differ in their investment approaches. Angel investors prefer early-stage startups, while venture capitalists focus on established businesses. Understanding these differences is crucial when seeking funding.
Investment Duration:
Angel investors may wait for several years for returns, while venture capitalists operate on an 8-12-year fund horizon.
Key Similarities and Differences Between Angel Investors and Venture Capitalists:
Both angel investors and venture capitalists invest money in exchange for equity ownership. They often have extensive networks and business experience to offer. However, they differ in their investment focus, approach, and source of funds.
Need Help?
Securing the right funding for your business is crucial for its success. Should you wish to find out more about Venture Capitalists or Angel Investors for your business, please contact us and we will work with you and help turn you dreams into reality and navigate the complex world of business financing with confidence.
Published by Sowerby Chartered Accountants, November 2023