Startup and growing small businesses need adequate funding to succeed.
The resources that are available from friends and family members are limited (usually < $100k), leaving SMB entrepreneurs scrambling to find other investors willing to participate in the company's future.
The two most common forms of investors small business owners pursue are angel investors and venture capital groups. In the right scenario, each of these types of investors can play a game-changing role in the life of a promising small business venture.
But while entrepreneurs sometimes think of these types of investors synonymously, there are actually some important differences between angel investors and venture capital groups. Understanding those differences is key to attracting the attention of the right type of investor and to enjoying a successful relationship with your investment partners.
- Funding Stages. Angel investors commonly invest in businesses during the startup stage, providing funding for new SMBs that may find it difficult to raise adequate capital through financing or family members. Venture capital groups, on the other hand, usually avoid funding startups. They prefer to fund businesses that are already off the ground and poised for explosive growth.
- Source of Funds. Venture capital groups pool the funds of multiple venture capitalists who may or may not materially participate in the management of the companies they fund. Although angel investor networks function in a similar way, the majority of angel investors are individuals who take a personal interest in each of the companies they fund.
- Exit Strategies. Both venture capital groups and angel investors take an equity stake in the company and develop exit strategies that allow them to earn a profit on their investments. These exit strategies are often executed through an IPO, company acquisition or equity buyout. But because they fund different stages in the life of the company, it's not uncommon for angel investors to exit the business before later investment rounds to avoid dilution.
- Working Relationships. Angel investors and venture capital groups contribute expertise to the companies they represent. However, when you work with an angel investor, the expertise is limited to a single individual. With a venture capital group, you may have access to a range of proven business professionals with diverse backgrounds and multiple areas of expertise.