If you’re in the market to take your startup or business to the next level you’re probably looking for a way to finance this growth.
If you’re in the market to take your startup or business to the next level you’re probably looking for a way to finance this growth. With a lot of options out there for entrepreneurs and business owners to look at, it all boils down to the timing and how you aim to utilise these funds. While the traditional business loan may not appeal or be accessible to all, let’s take a look at the more popular forms of raising funds that are taking over our news feeds. Angel investors and Venture Capitalists seem to be the talk of the town now. From helping companies scale exponentially to making them PR worthy, they’re worth taking a look at. Let’s get started with what they are:
An Angel investor is an individual who provides capital for a business or startup in exchange for convertible debt or for equity in the company. Angel investors usually support startups or young businesses that are in the initial stages of business, where most investors aren’t ready to back them. Also known as private investors, these individuals have a high net worth. In rare case you may even find them investing in companies for royalty. The funds they provide may be one time investments or could be in instalments. Angel investors look to invest in the startups that are in the early stages of business. These investments are usually risky in nature but they only represent around 10% of the angel investors portfolio. The reason they invest in such companies is because they’re looking for a higher rate of return than your traditional forms of investment. They usually play a big role in ensuring these early stage companies hit the ground running and they invest more in the capability of the entrepreneur rather than the business itself.
Venture Capital is a form of equity based financing and Venture Capitalists are the ones that provide it. It’s a type of investment provided to startups and small businesses that are expected to have a long term growth potential. Venture Capitalists are firms backed by well off investors, investment banks and other financial institutions. Venture capital may not necessarily be considered a financial aid. In some cases it can be provided in the form of technical and managerial expertise. VCs are now a very popular option for early stage startups and new companies with an operational experience of under 2 years. It could also be a viable option for companies that lack access to bank loans, capital markets or other debt instruments. This option does however come with a price and that’s losing out on equity in your company. VCs usually take equity as collateral for investing in your company and that translates to them having a say in business decisions. While it’s arguable that both these options of raising funds are suitable for startups/ businesses in their early stages and they both expect equity in return for the investment, there are clear differences between the two. Let’s get into how they’re different by listing out
If you’ve already taken your pick on who you want to proceed with, it’s best we get into how you can go about searching for them. First off let’s take a look at
While the internet may provide you a list of sites and forums for you to register on, the fact is that you should be aware of who you’re looking for. Preferable someone in your own domain/industry who will understand your business and improve your chances of raising some funds. Out of all the sites out there, Angel List is by far the most popular place to look for new hires as well as Angel investors. But the best way to find a suitable investor is through networking and evangelising your business. The chances are your network will hold the answer to your investment needs. Referrals will play a huge role so networking properly could make or break your chances of bagging a round of funding.
Finding an angel investment isn’t an easy process and can be time consuming. So plan ahead and ensure you start looking well in advance so as to avoid putting your business in a difficult situation.
Well the process isn’t very different from looking out for Angel Investors. There are quite a few of them so you can start off by exploring their resources online. Venture Capitalists get a tonne of requests and they only invest in a handful of them. So there’s more than just filling an application involved here. Here’s a few tips to help you out with the process of finding venture capital investors:
The rest is pretty much the same. Remember to look for VCs that have your company’s best interest in mind. VCs that invest in companies like yours could improve your chances of raising funds. VCs are far more time consuming and harder to come by so plan in advance to ensure your business does not take the brunt of it all. One more aspect you might want to take a look at before you make your decision to raise funds is weighing out the advantages and disadvantages of both these types of funding.
Ideal For Startups: This is an ideal form of raising finance for startups/ businesses in the early stages. Angel investors are always on the lookout for investment opportunities in new startups that are in the development phase or the ones that ready to enter into the market
Paperwork is Less: While you will need to draft a suitable business plan, along with targets, projections and a pitch, they tend to be less tedious than a business loan or VCs. APart from this you may also need a convertible note which is meant to finalise the investment. This is technically a short term debt that has an interest rate or a discount and has a valuation cap and a maturity rate.
No Monthly Payments: Because the angel funding isn’t a loan there are no monthly payments involved. This can help your short term cash flow since you won’t be adding monthly payments to it. Angel investors get paid eventually, either when an acquisition takes place or when more funding is raised, based on the terms that are set.
Additional Support: Apart from the funds and provided you’ve chosen the right ANgel investor to back you up. You could also gain additional help in the form of knowledge from these investors. Their industry knowledge could be crucial for you to wade through difficult situations in the future.
Networking opportunities: Angel investors can get you in front of potential customers, additionally they can introduce you to startups they’ve supported as well to help you build strong partnerships.
Assistance for future funding: It's in the angel investors best interest to ensure your startup succeeds because their payout is tied to either your company raising funds or being acquired. They will help you get in front of the right investors in the later stages of your business.
Availability is based on who you know: Even though there are multiple sites and forums to get in front of Angel Investors, your best chance of raising funds is through a referral from your network. Angel Investors go through many applications and the best way to improve your chances is by being referred through a reputable source.
Terms can be hazy and funding could be slow: Since angel investment is less formal than other types of funding and both parties want to get the best out of it, the decision making process can involve a lot of back and forth that may never lead to a finalised agreement. Try your best to get the agreement drafted in the most detailed manner as you push to close the deal.
An option to convert debt to equity: Angel Investors usually receive a convertible debt at a premium of 20%. At the company’s next valuation they can convert this debt to equity. This means the more times you raise funds the more equity you give away. In some cases original owners become minority owners thanks to giving away their equity.
Rapid growth is expected: Investors are always looking for a quick return on their investment and the case is the same with angel investors. This means the pressure on your company to grow will be high even if it doesn’t align with your long term plans for the business.
Founder control is reduced: With equity slipping out of your hand with every round of funding you raise, you stand the risk of losing control over decision making in the business. While it’s great to have assistance in the form of advice from investors, on the flip side it could also lead to some unfavourable decisions being taken for the business that may not align with your expectations.
Support and Guidance may be limited: With Angel investors, guidance to the business is only guaranteed in the form of monetary benefit and depending on the investors credentials may or may not be available in assisting you in running the business. Hence it is crucial to pick your investors wisely.
If you’re still confused and uncertain about how you should go about raising funds for your business, there are alternatives to both Angel Investors and VCs. Subscription Based Funding is a relatively newer form of financing that has gained support thanks to the flexibility it offers founders in today’s competitive environment. BridgeUp is a subscription based funding platform that provides instant upfront capital to businesses with recurring revenues. Find out how your company can raise funds through subscription based financing.