Getting financing for your startup is rarely easy, but if you approach the wrong investor, you can make it even harder than it has to be. “How can there be a ‘wrong investor’?” you might be thinking. “Don’t I just go with whoever is willing to give me the money?”
It’s not quite that simple. Approaching the wrong investor is kind of like asking someone who’s married out on a date. Not only will they turn you down, but they’ll probably think you’re an idiot.
Many first-time entrepreneurs mistakenly lump angel investors and venture capitalists together. While these two types of investors do have many things in common, they also have important differences. Here’s a quick rundown of how to tell if angels or VCs are right for your company. (Keep in mind that these are generalizations, intended to provide a starting point for your funding efforts.):
• Angels are individuals (or groups of individuals banding together) who invest their own money in a business.
• Angels generally invest less money than venture capitalists. If you are seeking $1 million or less (some will say $3 million or less), looking for an angel is probably a better bet.
• Angels are often entrepreneurs or “retired” entrepreneurs who have experience starting, running and growing businesses. More than a few are the “millionaire next door” type, rather than poeple who flash their wealth. Angels may also be professionals, such as doctors or attorneys. I actually knew an entrepreneur years ago who was funded by his dentist.
• The degree of involvement angels expect to have in your business varies. Some assume they’ll be actively involved, while others prefer a hands-off approach. In either case, you’ll very likely benefit from their advice and experience.
• Angels, of course, want to make money on their investments, and expect a high rate of return. However, in addition to looking at the numbers, they are more likely than VCs to be persuaded by your commitment to your business or the simple desire to help you succeed.
• Venture capitalists are institutional investors. They manage other people’s money and invest it in business ventures. VCs are responsible to the clients whose money they’re managing.
• Because they are dealing with money from many investors, VCs generally make larger investments than angels. If you are looking for $3 million or more, getting this amount even from an angel group will be more difficult than getting it from a VC.
• VCs are in a better position to provide multiple rounds of funding as your company grows. If you know you’ll need more than one round, creating relationships with VCs can be very valuable.
• VCs almost always want to put their own management team in place, and you will need to give up a greater degree of control than you might have to with an angel investor.
• In general, VCs think bigger than angels. If your business has the potential to scale huge and you can prove it, pitch VCs first.
• Passion? Desire? These things are great (and might help persuade angels), but VCs are all about facts. If you have prior experience launching similar businesses, if you’ve got a tested management team, if your numbers add up, then you’ve got a shot at convincing VCs.
The annals of entrepreneurship are filled with names of entrepreneurs who lost their companies to VCs or other investors (remember the saga of Scott Olson, founder of Rollerblades?). So approach angels and VCs with care, and try to protect yourself as much as possible.
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