Are we talking about the same thing?
In the entrepreneurial ecosystem, few entrepreneurs or founders have enough capital to scale their business on their own. Even before they can generate revenue, they need to finance the idea or invention and turn it into something that can be sold.
Normally, the costs are first financed out of pocket (credit cards, personal loans, savings), but if you want to take the leap and aspire to become the next unicorn, you need a significant injection of capital to materialize and scale that business idea.
At this point, a variety of funding sources appear on the scene that go beyond the bank and savings account itself. Each one of them intervenes in different stages during the life of the start up and there is no recipe for when to seek investment or how to do it.
In order to know which financing option is the right one for a business, it is important to understand the differences between all of them and be sure as to which stage project is at.
As can be seen in the table, there are as many sources of financing as there are stages of life of a start up.
In the earliest stages (circle) we find Angel Investors, Ventures Capitals and accelerators.
In the later stages, from Pre-Series A onward, funding comes mostly from Venture Capitals and strategic partnerships.
An Angel Investor is not a VC
The concept of Angel Investor is often confused with that of Venture Capital, but there are marked differences and each of them can bring a different value to the project.
Who are they? How do they work?
An Angel Investor is a wealthy, accredited individual who provides capital for a business, usually in exchange for equity, tokens or debt.
A marked difference between Angel Investors and other types of funding sources is that they invest their own capital, whereas a Venture Capital is a private firm that invests money that comes from third parties, from people who trust their equity in the expertise of these companies.
Angel Investors are generally more eager to support an idea, while a Venture Capital will want to see the growth potential of that start up before investing.
When do they invest?
Angels often invest at a very early stage, either at the idea stage or when they are validating the problem and getting some early wins.
In general, VCs get involved in the fundraising process after the angel investors, once the startup picks up some momentum. Even if the project gets on track, they tend to inject more capital at later stages (Private B-C).
Raising angel or seed investment is about proving a thesis, not building a business. Once you prove the thesis, you can raise capital to build a business. With the size of angel or seed investment, you can’t build a business, you can build the foundation of a business.
BEN NARASIN — ANGEL INVESTOR
How much do they invest, and what role do they play?
On average, angels often take a minority stake ranging from 0.1% to 5%, with tickets ranging from 50K to 500K. While VCs generally take a larger stake ranging from 5% to 20%, with tickets in excess of 500K.
In general, Angel Investors provide advice (mentoring) and support to the companies they back. This support is usually informal, such as providing contacts to strengthen the company or contributing their knowhow as accredited investors, while VCs are not interested in acting as mentors, but they are interested in having some control over how the business works and in some occasions may require a seat on the board of directors.
If an Angel Investor is a wealthy and accredited professional investor, does that mean that most of us will be left out of these types of opportunities, NO! Luckily there are Angel Syndicates.
What is an angel syndicate?
An angel syndicate is simply a group of investors who agree to invest together in a particular project. A syndicate can be created by angel investors or minority investors.
By working together, the investors bring a broader range of skills, years of experience during due diligence and traction. By doing so, the syndicate can take a stronger combined negotiating position and therefore gain access to better projects and better deals.
At TPC Club we act as an angel syndicate, we offer a low barrier of entry to participate in community deals and at an opportunity cost that allows even small investors the opportunity to get a good deal or entry regardless of the capital invested.
What is the best option?
All businesses require funding (capital) to function. With that said, funding is especially key to a startup’s survival. So which path should startups take to get the capital they need: Angel Investor or Venture Capital? Like many financial scenarios, there is no right answer. Rather, it depends on what stage the business is in.
As a rule of thumb, if an entrepreneur has an idea for a company, then an angel investor or angel syndicate might be the way to go. However, if they already started a company and need additional funding and/or expertise to grow it, then a Venture Capital might be the answer.
If you combine the strengths of both, the results can be spectacular.