When you start thinking about ways to fund your startup, you’ll start to hear lots of terms being thrown around. Two of the most common forms of startup fundraising include angel investors and venture capitalists.
Both types of investment can be extremely crucial to achieve the capital requirement that your business needs. Hence, understanding and differentiating between both terms is important.
Let’s take a look at both types of startup fundraising sources:
Angel investors are individuals with high net worth that provide financial backing to small startups or new businesses. Simply put, they invest their own money into various businesses. Oftentimes, angel investors will give new startups capital from their own savings, in exchange for convertible debt or equity.
Many angel investors enjoy investing in companies that are of interest to them; and they have enough money to invest.
Angel investment is a great source of funding for new businesses. This is because many angel investors are experienced business people who can provide a ton of useful insights to your business. Not only that, but they are usually willing to take bigger risks than a bank, and may even invest the money without expecting repayment if the startup fails.
However, if you are seeking angel investment, you should have a clear idea of how much involvement the investors expect. In some cases, you may lose out on a certain level of control. In some other cases, the angel investor may act as a silent partner and leave you to operate the company. In any case, the conditions should be listed in the term sheet.
Venture capitalists are individuals who invest capital into a company, usually a startup or small business, in exchange for equity in the company. Venture capital is a good method of fundraising for new businesses that may be relatively high-risk, and that wish to scale up quickly.
The biggest advantage of a venture capital firm is that your startup can expect to receive a large sum of money. Not only that, but there is no risk of having to pay the venture capitalists back if the startup fails.
Most venture capitalists also bring tons of business knowledge and are well-connected with other businesses, investors, and professionals that can help your business succeed.
On the other hand, venture capitalists often offer their investments in exchange for equity. This means you will be losing out on complete control of your firm. At the same time, since most venture capitalists expect returns that match their investment, you will eventually need to take your business public in order to scale it to the expected level.
If you plan on keeping 100% control of your startup and maintaining ownership forever, then venture capital may not be the best route for you.