There are two terms that appear regularly in the business world (particularly in small business and start-up companies), angel investors and venture capitalists. There can be questions that are raised when starting a venture about these two phrases such as: What do they mean? Why are they ‘angels’? How are they different? How are they similar? Which one should I approach? The following article will focus on these two business terms and address these questions.
ANGEL INVESTORS – THE LIGHTER SIDE
Angel investing is becoming more popular in Canada and as a result, more businesses and start-ups are starting every year with funds being provided by these investors. An angel investor can be any individual or group of wealthy individuals that use their own earned cash to fund business start-ups. In return, they tend to receive convertible bonds or a stake in the ownership; however some angel investors may not want a monetary return and may simply want to provide mentoring services for younger entrepreneurs or to be part of economic trends. Angel investors typically invest in companies that are less than 5 years old and are in the manufacturing, software, or energy service industries. Since angels invest their own money in the firm, they will generally require a very high return on investment (20-30x) in a short amount of time (less than 5 years). As a result, angel investors make very little investments, around 1 or 2 per year to reduce their own risk. In an infographic on VentureBeat.com, statistics say an angel investor is on average, 47 years old earning approximately $90 000 in annual income and invests $37 000 per venture.
VENTURE CAPITALISTS – THE DARKER SIDE
Venture capitalists can be described in one way as the polar opposite of angel investing. Venture capitalists are similar to angel investors in the sense that they provide funding to business start-ups; however, the source of the funding is different. Venture capitalists manage pooled resources, typically money of others through a fund. Venture capitalists are conclusively professional investors, who have experience and education in the business and finance field to make decisions and manage funds. Venture capital ventures are almost always focused on making a monetary return. They are less passionate about how they can benefit the company, how they can improve productivity etc, and are typically only focused on the math aspect of making money. Venture capitalists usually provide investments in the hundreds of thousands or even greater, unlike angel investors. Although both investments require high returns, if the business fails, venture capitalists may feel less of a pinch than angel investors since it is not their personal financial loss. The most popular industry for these type of investments are in technology, further supporting the fact of high six figure investments.
WHERE TO INVEST?
Before making an investment with either of these two investors, calculate how much money you would like to receive for funding. According to a Profit Guide article, a good way to determine your startup funding is to calculate your capital costs for six months’ operating costs plus 10% contingency money. Why 10% contingency money? Simply because starting a business can be more costly than anticipated. If the budget is greater than $75 000, then proposing to a venture capitalist is ideal. It is beneficial to also take into account the industry your business will be in. Manufacturing and natural resource service industries are typically invested by angel investors while technological industries are more popular among venture capitalists. One final thing to take into account is your own experience. Some angel investors will be more concerned for the future of your company and will be providing advice and useful information for you and your business. If you are still unsure of which investor to go to, then simply do both. Both investors receive hundreds (sometimes thousands) of business plans for review, so it doesn’t hurt to get a better chance.