We talk a lot about Venture Capital and startup seed investing on this blog – and with good reason. Investment money is exceptionally important to any startup or SMB enterprise. Whether you are trying to reach production phase, or just trying to grow your business to the next stage in a safe and sustainable way, investment funding is one of the most useful tools to an entrepreneur.
But there are three primary of ways to seek out investment funding:
1. Friends and Family
Generally seen as the largest source of funding, it’s also one of the most dangerous. Think about it this way – if you get in a fight with an Angel Investor, you probably don’t have to see them every Thanksgiving for the rest of your life!
2. Venture Capital
A Venture Capital firm is a Limited Partnership where partners pay into a fund overseen by a General Partner who invests the money in projects expected to be successful.
3. Angel Investors
These are your individual investors (though groups of Angel Investors exist known as Angel Groups) who earn more than $200,000 annually or are worth more than $1 million.
So which is right for you? Depends upon a few things, including the lifecycle stage of your business. We can get friends and family out of the way first. In general, our business strategists recommend against this for any project requiring a seed of more than $20,000, or preferably even less.
While it may seem the safest bet, we’ve seen too many good ideas get tanked by family in-fighting. Look, you probably like your friends and family and they probably like you. You should keep it that way by never borrowing money from them. Even worse, they probably won’t tell you if your idea is any good – again because they like you.
The benefit to having an investor doesn’t stop with the cash – in fact, one of the best boons is the source of advice an investor has. They been doing this for a while, and they’re probably pretty good at it! Angel investors especially demonstrate successful individuals who know how to read a market and take advantage of it.
Take the owner of the Valley’s most well-known and successful (despite its small size) firms – Steve Anderson. Anderson was the funder behind Instagram, as well as an investor in Twitter and Heroku. His next batch of investments promise to be just as popular and profitable.
To drive the point home, Anderson (whose net worth is estimated to be above $150million) was just recently named to Forbe’s Midas List. The Midas List is a compilation of the biggest names in tech investment and Anderson’s ranking as second on that list place him as one of the smartest and most successful investors out there. Anderson beats out long-time investor Chris Sacca and Mary Meeker, both big names in the tech industry – and both Angel Investors
So why don’t we look at when and where to look towards Angel Investors, as opposed to VC investment.
Venture VS Angel
Single Angel Investors generally provide between $25,000 to 100,000 to a company. This can vary – Anderson gave $250,000 to Instagram for their first round of funding, and Sacca is resting comfortably off a nice $8 million seed fund. Additionally, Angel Groups often pool their money together to invest much more money – sometimes more than a million – much in the way that a VC firm would work.
$25,000 – 100,000 seems small change when compared to the VC investments of millions (an average that comfortably rests around $7 million). But there are some things to consider first:
• Angel investors tend to invest in a project much earlier than VCs. While they won’t just fund any idea, they are much more likely to fun an idea with just an MVP or prototype. This is actually a stage where some money from family or friends would do you good: SDI can build your prototype for as little as $2,000 – plus we have contacts to VCs and Angel Investors throughout the tech world, including Silicon Valley. Contact us today and we can introduce you to some top league seed fund companies and angel investors in Silicon Valley.
• For the most part, Angel investors focus on getting a company through the last technical details and entry to market. VCs, on the other hand come in with what is known as “Series A” funding – basically a growth fund. So if you’re getting the ball rolling on your project.
• The biggest double-edged sword of Angel investing is they don’t generally need to check in with anyone else before making a decision. This can clearly work in your favor or not, depending upon the investor’s mood. Of course, things can move with more rapidity with Angel investors. But Angel Investors tend to be unique individuals (check out Ashton Kutcher’s own work with A-Grade Investments).
• The last point we will discuss today will cover an investor’s expected ROI. This is a tricky one – Angel Investors don’t have to operate under any timetable but their own. This seems nice on the face of things, but can be problematic. If an Angel Investor wrote a large check or has less funds than desirable, the timetable may be ridiculously small.
On the other hand, most VC funds have a pretty standard an inflexible deadline – about 10 years. This is because VCs funds have a 10 year cycle, during which the General Partner is required to have completed all projects and refilled the fund, plus profits. This can obviously be problematic if your growth isn’t fast enough.
To conclude, VCs and Angel Investors both have their place. VCs tend to be better for companies with a solid plan and a high potential for rapid growth; Angel Investors are better for in the conceptual phase. In fact it is not uncommon to see a startup use both avenues of funding:
• Angel investing is good for companies just getting off the ground (i.e. market entry and ramping up to production); at SDI we can help you get your project off the ground in 2016.
• VC investing is great for Series A funding needs – or reaching that next stage of growth.
There is plenty more that can be covered, but I recommend you check out our page on Angel and VC Investment or contact us directly to learn more. You can also feel free to give us a call at 408.802.2885 for a free consultation and idea validation with our CEO, Raj Srivastav. We look forward to hearing from you soon!