- They can take out a bank loan and repay it with interest
- They can get funding from a venture capitalist, in exchange for some control of the company
- They can receive funding from an angel investor, in exchange for equity in the company
What’s the Difference?
Both VCs and angels will give you money and advice on how to improve your business. Venture capitalists, though, typically want some control of your business. If you go the VC route, be prepared to be bossed around, and even potentially fired from the company you started.
Both VCs and angels know your industry intimately. They may have started and sold businesses in your field, so they’re great resources for you, as they can introduce you to the right people. This is worth as much, if not more, than the cash.
If you’re looking for $250,000 or less in funding, angels will be a better fit. They focus on smaller startups, while VCs want to grow your business to a multi-million dollar affair.
Many startups who work with VCs complain that what started out as a cozy company is turned into a bureaucratic nightmare, with layers of management being added, processes and procedures implemented and more accountability than ever. This isn’t necessarily a bad thing, but it’s something to consider if you want to keep your company a small-time affair.
With either type of investor, you’re having some of your profitability cut into. Equity can run from 5% up to 50%, depending on the deal you cut and the resources they’re providing you. While the 5% deals are few and far between, don’t be afraid to negotiate down the percent…if you can afford to be turned down.
If you’re a Type A personality, having a VC or angel “meddling” in your business will likely drive you crazy. Your personalities might clash, but try to keep in mind the investor is trying to make money, and make you money too. Acquiesce to some of his demands, assuming they’re reasonable.
There are doors you pound on as a startup that simple will not open without the right key. VCs and angels have those keys, and once you’ve partnered with them, they’ll open doors you never would have gotten open on your own. Their experience is priceless, and by having a VC serve on your Board of Directors, you can go in new directions you never dreamed of.
The money, too, is nice. With funding, you can buy new equipment, increase your supply orders to decrease per unit cost and market your product. In a nutshell, you can grow your business.