Taking an investment from an angel investor or a venture capital (VC) lender is a very popular way of kick-starting a business or new idea. However, despite sharing many similarities, angel investors and VCs differ in several fundamental ways that can shape the way you develop your business.
Depending on the type of business you’re trying to launch, and how you plan to run it, choosing the right funding model will be fundamental to achieving your goals. You may find that you are able to secure a satisfying level of investment, but at the cost of giving up more control than you would like. Equally, you may find that your investor does not provide enough vital early support that many fledgling businesses require.
To help you on your journey, we’ve compared the various ways angel investors and VCs will interact with your business, and what they look for when it comes to funding opportunities.
Angel investors vs venture capital lenders
Appetite for investing
The first key difference between angel investors and venture capital lenders is their approach to identifying investment opportunities.
An angel investor will often be interested in making their investment at the very early stages of your business. If your company has yet to demonstrate a track record or is developing a new product or service, angel investors will often be a more valuable and appropriate source of funding.
VCs typically want to see working products or services, or businesses that have a proven track record. In this sense, you may need to prove that your business is capable of making a return in order to successfully secure VC funding.
Securing investments
The amount of money your new business needs will also influence whether an angel investor is best for your future business.
As angel investors invest their own money, the amounts tend to be lower than VCs, which can have access or massive funds to invest. Angel investors are limited to their own funds, but this can still typically be hundreds of thousands of pounds – often even more.
However, given the sheer variety of angel investors, your mileage may vary significantly. If your new business needs substantial investment, using angels could be considered, but you might find more opportunities when opting for VCs.
Ownership and control
Not to be confused with the level of involvement, this area refers to what percentage stake in your business an investor will own as part of the funding deal.
Simply put, if you’re wanting to retain as much of your business as possible, then an angel investor will be the best choice. They generally seek smaller portions of equity in your business, ensuring you continue to have a controlling interest.
VCs often want to make significant investments in exchange for similarly large percentages of ownership.
Levels of involvement and decision making
Beyond securing enough funding, perhaps the biggest concern for owners is how much involvement their new investor will have in the running of their business. You may be able to secure all the funding you need, but you could give up a degree of control over decisions, and be unable to dictate how long those decisions will take.
Generally speaking, angel investors are mostly interested in the technology or market your business will sell to, and because they are using their own money, will often take a hands-on approach in certain key areas. This often comes in the form of networking and marketing the business, such as making additional introductions to people with specialist skills, or acting as a mentor. Decision-making in this context also tends to happen quite quickly, which can be vital for brand new companies.
VCs, on the other hand, are investing on behalf of the pool of investors they manage. This means more oversight regarding the investment and less personal involvement in the day-to-day running of your business. Decision-making can also take far longer than when dealing with angel investors, as each VC will have its own established processes.
Angel investors vs VC: Which is best for my business?
Choosing an angel investor rather than taking a VC investment is often selected as new business owners are looking for more than just financial help. You often see this approach on the BBC TV series Dragon's Den, where the expertise and professional connections of the dragon are often just as important as any financial investment.
However, as Eric van der Kleij, one of the masterminds behind Technation and Canary Wharf's Level39, tells ITPro, not all angel investors will want personal involvement in the businesses they support.
"Angel investor experience varies widely,” says Van der Kleij. “Some are familiar with the challenges of investing in start-ups, such as the long illiquid investment period and the possibility of investment going to zero. In contrast, others do not understand the significant risks at all.”
“Most angels only write a single cheque and cannot always be relied on for additional capital if the company needs it. Depending on their background, they may not be able to provide meaningful guidance or assistance to the founders in terms of product feedback, tech design or best business practices.”
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One of the critical advantages of choosing an angel investor over a VC is that angels tend to have a broader interest in the businesses they support. VCs can often focus on just one sector – tech is a typical example. Suppose your new business is in an industry or sector that may be unusual or very focused. In that case, an angel may be interested in that specific business space. This motivates them to support your new enterprise, as they have an innate interest.
A challenge for new businesses looking for angel investment is locating the individuals they need. Several networks can be tapped into, including Angel Investment Network, The British Business Bank has a handy guide and links to regional networks. The UK Business Angels Association (UKBAA) has hundreds of members, and Angels Den. If your business is based in London, there are several specific angel investor networks to contact for funding.
How to work with an angel investor
Angel investors need to be attracted to your business. Often, angels want to see a significant personal investment that illustrates your commitment to your new business.
Angels also invest in people, not their businesses. They want to see experience and passion demonstrated by the business owner. This shows the investor a commitment and that money will be spent wisely. Remember, angels are not philanthropists. They want a healthy return on their investment as much as any VC.
Being honest and realistic about your business is also a critical component of attraction for angel investors. Your business plan and cashflow forecast should be realistic. Avoid unsubstantiated claims about the value of your business, as angels will see this as misunderstanding the financial future of your business, especially if this is for a new product or service that is unproven in the marketplace.
For new businesses, angel investors could be the ideal partnership. Angels bring the financial support your unique company needs, but the biggest benefit is the network they carry with them. Finding an angel that has as much passion for your new enterprise as you do, can result in a long-term relationship and a flourishing business.
