Do you need an angel investor or venture capital?

Many entrepreneurs are faced with the question of what type of investor is necessary for the stage of their business.  The answer is not always cut and dried.  However, the following are typical patterns of behavior for investors based on different stages of a company and the investment amount.

When do you need an angel investor?

An angel investor is a wealthy individual, many times with previous success as an entrepreneur, who invests his own private money in early stage companies.  They can be found in virtually all industries.  Angel investors usually invest after family and friends, when the company has more than just an idea.  However, angel investors usually invest before a venture capital firm.  Typically an angel investor will put up from $10,000 to $1,000,000 per deal.

The Motivations of an Angel Investor

Knowing the motivation of a particular angel investor will help you determine whether they are a good fit and tailor your approach to their needs.  Some unsophisticated angel investors fund companies solely for the potential financial returns.  Most angels have additional reasons.  Many want to continue using the contacts and experience they have acquired throughout the years.  Others simply want to be involved in the startup world again.  Still others may want to help other entrepreneurs in an advisory role or stay up to date on the latest advances in an industry.

The Catch-22 with Your Investors

You may not want to give up much control of your company.  However, some of the largest advantages of a sophisticated investor include their seasoned advice and the supply of helpful contacts they provide.  Most angel investors that can offer lots of help will want to be involved and control a substantial portion of the company.  They realize that all startups are high risk, and they want to help it become successful so they can get the high returns.  Obviously the larger their piece of the pie, the better return they will get.

When do you need venture capital?

A venture capital firm invests other people’s money.  Because of this, a venture capitalist has a different motivation than an angel investor.  The goal of a venture capital firm is to bring their investors a large profit.  In fact, most times angel investors require less return than venture capital firms.  To get large returns, venture capitalists only consider companies with huge growth potentials in large market spaces.

How should I choose a venture capital firm?

Usually a venture capital firm will not consider deals less than several million.  Each firm will have a typical deal size, and you will waste your time if you are not within that range.

Like an angel investor, most venture capital firms do not invest in companies that are not close to them.  They realize that many times entrepreneurs need their advice and contacts as much as their money and distance makes communication more difficult.  They also tend to invest in particular industries in companies at a particular stage.  Thus approaching the best-fit venture capital firm will greatly enhance your chances of getting funded.

What if you need between $500,000 and $2,000,000?

Many times it is difficult to find a single angel investor or a venture capital firm to provide $500,000 to $2,000,000 because it is too large or too small a deal, respectively.  Sometimes after one small venture capital firm provides funding, others will follow.  If you cannot raise money from a venture capital firm, you can try to form a syndicate of angel investors.  While you may not be able to locate one “superangel” to give you the amount of funding necessary, you may be able to convince a group of angels to do so.  Alternatively, you could get the funding through several rounds instead of trying to get it in one swing.

Regardless, plan many months ahead when raising capital.  It can be a frustrating, time-consuming process, but when it pays off your business will have reached the next level.  Knowing the differences from angel investor to angel investor and from venture capital firm to firm will save you significant amounts of time.