Previously, we wrote about Lean Startup and how it can fit Time and Material Work Format. Today, we would like to compare Angel Investing, Private Equity, and Venture Capital. If you are looking to take your business to the next level, you will need capital.
Capital can help you to:
- Buy new machinery and software;
- Upgrade or move into new offices;
- Launch new products and services;
- Move into new territories;
- Take on, new employees.
Table of contents
- What we will look at in this article?
- What is angel investing (also known as ‘seed’ investing)?
- What is venture capital (also known as ‘VC’)?
- What is private equity?
- Which type of funding is right for my business?
- In summary – our thoughts about investing
Although you can put your own money into the business and borrow from family and friends. At some point, you will need third parties to get involved in helping you move forward.
The benefit of investment is that you don’t have to put your own capital at risk. It means that you don’t lose as much if the business is not a success.
So, how can you get an investment? There are many different options available, each option with its own advantages and disadvantages.
What we will look at in this article?
In this article, we will look at how private equity, angel investing, and VC work, including the advantages and disadvantages of each and how to find funding.
That way, you can determine which is the right funding choice for your business and how to move forward.
We will also look at other options for getting investment for your business, as well as our top tips for finding the best investors.
Join us as we look at which will win out: angel investing vs venture capital vs private equity.
What is angel investing (also known as ‘seed’ investing)?
Ideal for: Fledgling businesses that want to get started quickly.
‘Angels’ are wealthy entrepreneurs who invest their own money in businesses that they have an interest in. Angels can work individually or as part of a network or syndicate. Examples of famous angel investors include Mark Cuban, Richard Branson, and Jeff Clavier.
The term ‘angel investor’ comes from the theatre world, when investors would put money into shows that would have otherwise had to have closed down.
TV shows like Dragon’s Den and Shark Tank are good examples of angel investing. Companies that are starting out showcase their products, and experienced investors bid money in exchange for a proportion of the business!
Angel investing is ideal for early-stage businesses that may not yet be making money, but have a solid minimum viable product to work with. The product isn’t always the most important thing though. Angel investors generally want to see passion and integrity from the founders of the business.
Capital for angel investing usually starts at €10K. The more angels that invest, the more money that will be available.
Angels exchange their money for shares in the business – this is known as equity. If your company is in the really early stages of formation and is not in a position to offer shares, you may choose to give the investor the right to buy shares in the future instead.
How much equity should you give away? Angel investors may want between 20 to 25% of your business in return for investing. However, this ultimately depends on the industry, the amount of capital needed, and the product. Some angels may be willing to flex if they really like the product, company… or you!
The advantages of angel investing
- It’s a simple option. Angel investing is one of the easiest ways to get financing for your business. Virtually anyone can be an angel investor if they have money to offer as well as experience in the industry.
- You get more than just funding. Angels can provide a mentorship role to your business, offering help, advice, coaching, and networking opportunities. Many angels are successful entrepreneurs in their own right. This can be a significant advantage and can help your business to grow faster.
- Angels may be willing to take a gamble on your business. You may struggle to get funding for your business from other sources if your business is seen as high-risk or unusual. Many angel investors are happy to take a risk on more unconventional business ideas.
The disadvantages of angel investing
- A loss of equity. As an angel will exchange money for a share of your business, you end up losing some control
- Angels may want too much involvement. While support and mentorship can be great for a new start-up, some angel investors may wish to have a more ‘hands-on’ approach to your business. This may cause problems if they want to get involved too much or if their business style is vastly different from yours
- Less ‘formal’ than other options: There is often less structural support than there is with venture capital or private equity. While this can be an advantage if you are looking for casual support. It may not be helpful if you are looking for more structure
- There are bad investors out there. Angel investing is not regulated in the same way as venture capital is, meaning that there are some unscrupulous angel investors. These investors may not only bail on agreed investment but may offer bad business advice
How to get angel investing
There are lots of different ways you can get an angel to invest in your business. One of the easiest ways is to network with investors, either online (e.g. on social media sites like LinkedIn) or offline (e.g. at networking events). There are also specific angel investor networks that you can sign up to, including Gust and the Angel Capital Association (ACA).
What is venture capital (also known as ‘VC’)?
Ideal for: Businesses that want to take steps to grow to the next level
With venture capital, the investments come from a combination of entrepreneurs, bankers, and financiers. This type of financing is usually offered to small businesses and lean start-ups that are doing well and have the potential to grow rapidly.
Venture capital is an excellent option if you need more money to move your business forward, with capital starting from €1M.
The advantages of venture capital funding
- You will receive support and mentorship. Similar to angel investing; you will have skilled and knowledgeable people on your board that will be able to help push your business onward and upwards. As well as entrepreneurs, you will have bankers on your side who will be able to advise you on how best to spend and save your capital
- You will see results quickly. Venture capitalists like to get results in a short amount of time, so they may be keen to push you and your business forward to get a satisfactory outcome. This is definitely an advantage, but it could also be a disadvantage if the venture capitalists try and push you in a direction that you don’t want to go in
- Strict regulations and processes are in place. Venture capitalists are strictly regulated – for example in America venture capitalists are regulated by the US Securities and Exchange Commission. This means that if you receive an investment, it will be safe, and you will have recourse to complain if you think the investor is acting unfairly or not in your best interests
The disadvantages of venture capital funding
- A loss of more control than with an angel investor. Venture capitalists will receive shares for their investment. They may also ask for a seat on your board. As they are asking for more money, they will request more shares than an angel investor might. A seat on the board will also mean that they have more of an active say in the decisions that are made
- It can take a while to source funding: It can be hard to find a venture capitalist, and it may take a long time to convince them to come on board. It can often take weeks to set up an appointment just to see someone and arrange a pitch, and then months to get a decision!
How to get venture capital funding
There are specific venture capital firms that you will need to approach to get funding. A lot of venture capital firms focus on a particular industry or size of business.
American businesses can reach out to the National Venture Capital Association (NVCA) to be put in touch with venture capital firms. The British Private Equity and Venture Capital Association (BVCA) is the UK alternative.
What is private equity?
Ideal for: Large mature businesses that want to sustain their growth, or that need a helping hand
Private equity is used when a company has been around for a while and is making money. It may be that the business is generating profit but needs a lot of money to grow to the next stage. The business may also be in decline and needs some extra capital to help it get back on track.
Bankers and finance professionals supply the capital for private equity, and investments can range from several million, even into billions.
The advantages of private equity
- Large amounts of money are on offer. Private equity can offer a huge amount of money for your business, a lot more than angel investment or venture capital funding can
- Long-term investment over short-term investment:.Private equity focuses on long-term investment, meaning that you do not need to make multiple rounds of investment. This can save you time and resources in the long-term
The disadvantages of private equity
- You need to be a well-established business. Of all the types of funding, private equity is the most challenging type to gain and is only awarded to certain kinds of businesses. You will need to have a very solid business plan in place to be considered. Generally, start-ups are not considered for this type of funding unless they have had amazing growth
- You won’t receive advice and support. You are unlikely to get mentorship and support in the same way you would with angel investors or venture capitalists. With private equity, the money is the reward
- You may lose complete control of your business. Private equity firms generally end up having a majority stake, or even full ownership, of the businesses they invest in. If you need private equity, this is something you will need to take into consideration. The private equity company may even sell your shares to someone else, meaning that someone you don’t know or trust could have a significant stake in your business
Take, for example, Toys R Us, the international toy store. The company was purchased for $6 billion by a private equity firm in 2005. However, Toys R Us had to pay this money back, and the company struggled to the point that it had to file for bankruptcy in 2017.
While this is an extreme example, it is something to think about when considering private equity. The opportunities to win are high, but the odds of losing can be high too.
How to get private equity
Key private equity firms include The Carlyle Group, The Blackstone Group, and Apollo Global Management. There are over 2,500 private equity funds in Europe, with the most significant fund worth €8.5B alone.
You can reach out to a private equity firm with your proposal or alternatively, a private equity firm may get in touch with you if they think you would add value to their portfolio.
What are the alternatives to funding?
Are you not in a position to get funding, or you do not want to give away control of your business?
If the answer is yes, there are other options for funding available.
The easiest is to use your own capital to power your business to the next level, either by using your own savings or credit cards. This is known as ‘bootstrapping’.
According to Neil Patel, 77% of small businesses fund themselves through personal savings and finance alone.
Alternatively, you can consider:
- Lending money from family or friends;
- Crowdsourcing the money that you need (for example, through sites like Kickstarter). You can either do this in exchange for equity or for goods and services;
- Getting a loan, either through the bank or through peer-to-peer lending sites like FundingCircle;
- Get a grant from your national government, a charity, or a third-party organization. There are also competitions that you can enter to receive money, like the MIT $100K Entrepreneurship Competition.
Remember that with all of these options, you won’t receive mentorship and support in the same way you would with other types of investment.
Which type of funding is right for my business?
Now that you have found out more about the three different types of funding, you may be wondering which is the right choice for your business.
The answer is… it depends.
The correct option will ultimately depend on your start-up’s size and the stage your business is at.
- If your business is just starting out, you will need an angel investor who can invest in your business as well as offer support and advice to help you to grow
- In case you are further along your business journey, venture capital is the right move to push your business to the next level
- If your business is larger and you need a lot of money, then private equity will give you the large amount of capital that you need.
Bear in mind that you might not go directly from angel investment, to venture capital, to private equity. For example, you may go through several rounds of angel investment before you are in a position to apply for venture capital.
You may find that angel investment is enough to sustain your business, and you don’t need the other types of funding at all.
With all of these options, bear in mind that you are exchanging shares in your business for money. This means you will lose control and ownership of your company to various degrees.
Our top tips for getting funding
Comparing Angel investing, Venture Capitalists, and Private Equity, we would like to highlight the next points. Whether you need €10K or €1M, it’s essential to be thorough and meticulous when trying to appeal to an investor. Here are our top tips for increasing your chances of getting funding.
- Get your team on board. It’s essential to get buy-in from your senior management team. Getting funding can mean significant changes to the way your business operates, so it’s critical to make sure everyone is on board from the beginning
- Put your own funding down: Investors are often more willing to invest if you have already funded your start-up yourself. This is because you have invested your own money in the business and shown that you are not high-risk
- Understand what your investor needs to offer. Consider what you want from your investor. Do you just want capital, or do you want their time and expertise too? Do you want someone with experience in your specific industry or who has general business acumen and might be able to push you into new markets?
- Have all the information ready to go. Knowledge is power – have a pitch deck, minimum viable product, or financial information on hand to show your potential investor. Put the key information at the start of any documents as investors are very busy people! Remember that different investors will want to see different things from you. Like a job interview… you need to spend time investigating!
- Speak to other start-ups. If you are keen to get a specific type of funding or work with a particular investor, talk to other businesses in your industry. They will be able to give you helpful hints and tips.
- Reach out to people: Network as much as possible. Networking is one of the best ways to find someone willing to invest in your business. You can network at events and shows, as well as online (for example, using LinkedIn)
- Get to know your investor. It’s essential to ensure that you and your investor get on well and will not rub each other the wrong way. If you have personality clashes, it might not be a good idea to give them control of your business
- Read the rules. You need to know what information you need to provide to your investor, and what you need to give them in return. You don’t want to sign a contract only to find that you are giving away more of your business than you anticipated
- Have a ‘plan B’ in place: Consider what you will do if you are unsuccessful. Will you try again with another investor or try your luck with a different type of funding? The important thing is to be persistent as you may not get the financing you want the first time around
In summary – our thoughts about investing
If you are looking to move your business to the next level, getting investment is an excellent way to do this.
Like all things, there are advantages and disadvantages to getting different types of investment. You will need to give up some control of your business in exchange for money – generally, the more cash you get, the more significant the loss of control.
However, the financial boost you will receive can help you advance forward, and you may also get additional business advice and support as an added benefit too.
Take, for example, the sports clothing manufacturer Under Armor. The company started in 1996 with $20,000 worth of savings and $40,000 of money from investors. Under Armor is now worth an incredible $1.9 billion!
Angel investing, also known as ‘seed’ investing, involves wealthy entrepreneurs (angels) investing their own money in businesses they find promising. Angels can work individually, as part of a network, or a syndicate. They seek businesses with a solid minimum viable product and passionate founders.
Angel investing focuses on early-stage businesses and involves individual investors providing capital and mentorship. Venture capital is for businesses with growth potential and involves funds from entrepreneurs, bankers, and financiers who offer support and expertise.
Angel investments can start from around €10,000. Angels may seek around 20 to 25% equity in return for their investment.
Venture capital is provided to small businesses with growth potential. Capital amounts can start from €1 million and vary depending on the business’s growth prospects.
Angel investing offers a straightforward option for financing. Angels provide mentorship, advice, coaching, and networking opportunities. Angels may take risks on unconventional business ideas.
Angel investors typically require equity, leading to a loss of control. Some angels may want excessive involvement in the business. Angel investing lacks formal structural support and regulation.
Network online (e.g., LinkedIn) or offline at networking events. Join specific angel investor networks like Gust or the Angel Capital Association.
Venture capital is suitable for businesses with growth potential and the need for significant funding to reach the next level.
Venture capitalists offer support, mentorship, and expertise. They aim for quick results and may push businesses to grow rapidly.
Venture capital is for businesses with growth potential and involves funds from multiple sources. Private equity is used for established businesses needing further growth or support.
Private equity is used for mature businesses that need substantial capital for growth. Private equity involves a large amount of capital from bankers and finance professionals.
Alternative options include personal savings, credit cards, family/friends lending, crowdsourcing, loans, grants, and bootstrapping.
Engage your management team and ensure alignment. Use your own funding to demonstrate commitment. Understand investor expectations for capital and involvement. Prepare key information such as a pitch deck and product details. Network extensively and build relationships with potential investors.
The choice depends on your business size, stage, and growth goals. Angel investing suits early-stage businesses, venture capital suits growth-stage businesses, and private equity suits large businesses needing substantial capital.
The investment provides a financial boost for growth and expansion. Investors can offer mentorship, advice, and expertise to accelerate business development.
Under Armour, a sports clothing manufacturer, started with $20,000 in savings and $40,000 from investors, eventually growing to a value of $1.9 billion.
Venture capitalists are strictly regulated by authorities such as the US Securities and Exchange Commission (SEC) to ensure fair practices.
Different funding options involve varying degrees of control loss as equity is exchanged for investment. Businesses should carefully consider how much control they are comfortable relinquishing.
Create a pitch deck with essential information about your business, product, and financials. Highlight key points at the beginning of documents as investors are often busy.
Yes, businesses may go through multiple rounds of angel investing before seeking venture capital or private equity. The funding journey can vary based on business needs and growth trajectories.
How You are launched can help your startup get funding and investment
You Are Launched has been working with lean start-ups, accelerators, and venture capital companies since 2014.
We can help you get your start-up up and running, helping you create a solid launch plan that will get you the vital funding that you need to grow
Get in touch with us today to find out how we can help your business move to the next level.