The funding choice for start ups is one of the important decision as after taking the funding a startup needs to work with it and return the money within the required time with the interest. Once a funding choice for start ups has been chosen, it cannot be undone so choosing it becomes a very important decision.
Startups primarily require two equally important things, which are:
- Customers; and
- Funding choice for start ups
Attracting customers is done via marketing and different business strategies.
But funding choice for start ups is a completely different story. Finance is a vast world in itself. It requires planning, a lot of it in order to maintain the finance of a company. Even marketing requires funds up to a certain level. Raising funds for a startup is a very nasty job. The fact that startups are new to the market and have a high probability of failing doesn’t help their case at all. Taking loans from the bank is a very difficult job due to the rapid growth of startups in the Indian market. Loans call for security like assets. Startups can rarely bring something up in security terms. In such case scenario, angel investors and venture capitalists become the savior. But, how are you supposed to differentiate and pick the best funding choice for start ups? The answer is discussed below.
Angel Investors v/s Venture Capitalists
Angel Investors and Venture capitalists, both are fund providers. They are people with money who look for promising companies and invest in them. But there is a difference between the two. While angel investors generally invest in startups or small businesses, venture capitalists generally invest large amount but in exchange of some kind of power in the company. Angel investors invest comparatively small amount and do not participate actively in the decision making. They generally do not hold any kind of power and are the first option of raising funds for any startup. Angel investors stay for a short period of time in a company when compared to venture capitalists. VCs generally exist in a group or a firm.
Difference between Angel Funding & Venture Capital
Some of the main areas where difference between Angel Funding & Venture Capital can be drawn are:
Decision-making: Venture Capitalists generally demand a board seat or some similar kind of power. They actively participate in the decision-making. They even, sometimes, hold more power than other partners or directors. This may create a lot of interference. On the contrast, angel investors like to sit back and watch. At the time of investing, they show trust in the company and its vision. They rarely give advice and are not that active.
Investment: Angel investors generally fund at the starting of the business that is when a business is nothing but a mere startup. They invest a small amount. However, venture capitalists come in play when the startup is somewhat established. They invest a huge amount of money. Venture capitalist also conducts due diligence in a very precise manner. The huge amount they invest is a big reason behind it. Angel investors can or cannot involve themselves in a detailed due diligence. It depends on how much convinced they are from you and your idea.
Time period: Angel investors, due to the small amount of money don’t stay in a company for long. Their staying period ranges from two to five years. However, venture capitalists, who invest a huge amount and hold certain powers in a company, tend to stay for long. Their staying ranges from ten to fifteen years.
Which one is the best choice for a startup?
From the above differences, it is clear that raising funds is not at all easy. Also, both angel investors and venture capitalists look for different things. Angel investors put their trust in startups while VCs are more bent towards profit and hence, tend to go with big companies. When it comes to a startup, your first preference logically should be angel funding. Simply, because there is almost zero interference and the small amount can suffice the need of your startup. However, as your company grows, venture capitalists should be considered. Though, venture capitalists should be dealt with carefully. They are different from angel investors. They generally look for power and profits when they invest. Interference is expected. Anyhow, a legal contract should be established in both the cases. Terms and conditions from both the sides should be talked upon and should be clearly stated in the contract.
Prepare yourself mentally before going out. Raising funds is no joke. There will be times when you will fail. But, you need patience. Patience is the key to success, especially in the financial world. Be persistent but not desperate. Select carefully and ask yourself that up to which extent you can tolerate interference and how much money is really needed. Self-fund yourself as much as possible.
Angel investors and venture capitalists, both are looking for their profits. They wish to earn via your company. The scale of their desire may differ but at the end, it is money that they wish. Therefore, choose carefully. Speaking technically, angel funding is the first option for any startup. But, you do not need to follow the crowd. If you are absolutely sure about it, you can go for VCs also. Think wisely and choose correctly.