Angel funding and venture capital, also known as private equity financing, are ways for investors to get in on the ground floor of startups. Private equity financing is excellent for you and for investors who see your potential early enough to jump in while the prospective ROI is at its highest. The benefit for you is that you can fund your business without taking on debt, such as a small business loan from a bank or the Small Business Administration.
Venture Capital is difficult to secure. The market is hugely competitive, and the system is fraught with inequities. If you’re a female founder or person of color, your chances of securing venture capital to scale your business are severely diminished.
In an earlier article, we provided tips to help you move your pitch to the top of the pile. In this article, we’ll look more closely at seed capital and angel funding.
The Venture Capital Market is Hot
According to TechCrunch, $428 million is invested into American startups every day. 2020 is on record as one of the strongest for venture capital investments, despite the global pandemic. Pitchbook data shows that venture capitalists invested as much as $156.2 billion in U.S. startups in 2020. It sounds like a fantastic accomplishment, but the total liquidity that American startups generated was around $290.1 billion.
But Is Venture Capital For You?
Here are some interesting statistics from Fundera:
- 77% of small businesses use personal funds to cover startup costs
- The average startup requires roughly $10,000 in capital
- Only 0.05% of startups raise venture capital
- The average seed round is $2.2 million
Unless you see yourself in that 0.05% of startups, you’re probably not going to secure venture capital financing. Fortunately, traditional VC funding is not your only option. So don’t let these statistics stop you.
Seed Funding for Startups
Seed funding, also known as seed financing or seed capital, is much smaller than VC capital. The application process is less intimidating.
For investors, seed funding is riskier than venture capital. You’re just getting started. They’re making a bet on the viability of your idea. With little hard data, seed funders must predict your product or service’s success and impact in the marketplace.
At the same time, seed investing has the potential to reap enormous returns to investors. Facebook and Google are great examples of two startups launched by individuals who had never run a business. Facebook’s first outside investor, Peter Theil, put $500,000 into the company. He received a 10% stake in the social platform, sold most of his shares in 2012 and 2017, earning more than $1 billion.
The bulk of seed-stage funding comes from Angel investors like Sarah Kunst of Cleo Capital, Jeff Morris, Shruti Gandhi, and Alexia Bonatsos. According to PitchBook, there were roughly 5,227 seed funding rounds last year for a total of more than $10 billion. Almost $3 billion has been invested by Angel funders every year since 2014.
What is an Angel Investor?
Angel investors are high-net-worth individuals who develop a personal stake in the startup beyond the ROI. Leading CEOs, business owners, and celebrities are among those who become angel investors. Typically, angel investors are serial entrepreneurs who want to draw upon their successes to help the next generation of startup leaders.
Most angel investors pool their resources and form angel investing groups. There are roughly 400 such groups in the U.S. Among the better-known are Houston Angel Network, New York Angels, and Tech Coast Angels. Increasingly you will see Angel groups combing forces and joining early-stage venture capitalists to make an early-seed round investment of as much as $2 million.
What’s the Difference Between VC and Angel Funding?
On the face of it, VC and angel funding seem very similar. Both provide startup capital in exchange for an equity stake in the company. But this is the only real similarity.
Angel funders:
- Are not full-time investors
- Use their own money
- Are not averse to risk
- Want to know that the ROI will be better than what they would get by investing in the stock market
- Focus on smaller, younger startups ignored by VCs.
The average individual investment in 2019 was $73,700. Angel investors fund more than 63,000 startups every year.
VC funders:
- VC capital is pooled from outside sources such as insurance companies and pension funds
- Venture capitalists tend to wait until the second stage of startup financing
- The investment stake from VCs is much larger, roughly $16 million
Angel investment empowers you to make it to the stage of qualifying for venture capital. A study out of MIT found that startups that receive angel funding were between 20-25% more likely to still be in business four years later. Angel investments made a difference in growth, too, with 16-19% more likely to increase to 75 or more employees.
Tips for Securing Angel Funding
Angel investors have shifted their strategy recently. Today, most are diversifying their investments into “silos.” Investment silos are similar to industrial verticals—for example, energy/green technology, life sciences, consumer products, technology, and so forth.
Recommendations from friends and colleagues play a significant role. Angel funders want to know that you have the potential to scale quickly. However, the most important criteria are your passion and capabilities to lead a team from startup to market leader.
What do angel investors want to see?
- a return on their investment
- a strong management team with experience in research, sales, accounting, human resources, product development, and manufacturing
- a solid business plan, including realistic financial projections, marketing strategy, details about the target market, and a vision of how the company will grow and become competitive
- how the investment will be used
- that you’re on track to disrupt on a global scale
- early customers or interest in your startup, such as press reviews, pilot customers, consumer feedback, participation in accelerator/incubator programs
- passion and commitment to living through the lean times
What do you need to do to secure angel funding?
- Research
Angel investors come with different motivations. Some are passionate about launching new tech products into the world. Others are inspired by ideas that have the potential to change peoples’ lives. Some love the opportunity to mentor, nurture and help scale a novel product or service. Before you pitch, investigate their previous investments to understand what motivates them.
- Network
If you can find someone who knows the investor, use that contact. The latest trend is to pitch angel funders in Clubhouse. It’s not a formal presentation; more like outreach. Nevertheless, if you’re on this app, jump in while the opportunity still exists.
- Prepare your pitch deck
Before your first meeting, angel investors want to see a pitch deck. This is the first impression you’ll make. Take your time. Follow these tips, download successful pitch decks prepared by other startups, and try it out with your team and colleagues before sending it to the angel funder.
- Present the best aspects of your team
When describing your team, be sure to talk about:
- How long you’ve worked together, and whether you’ve worked together before
- All relevant experience
- How is the team uniquely qualified to take the startup from launch to scale?
- What motivates and inspires you, the founder, and your team?
- How many people do you anticipate adding to your team over the next year?
Bottom Line:
Angel funding has many benefits:
- No debt. At this early stage in your development, you want to maintain a healthy cash flow, not burdened by debt payments.
- Angel investors bring more than money. They also bring expertise that you can tap into as a new founder to help you achieve your business goals.
- Less paperwork.
- They’re with you for the long term. If you succeed, the chances are excellent that your angel funders will invest in the second round.
Important Update:
Ventures Founder LLC published an article recently. They talk about the increased focus on mission-driven startups. For instance, they quote from Now Capital,
“…dedicated to enabling early-stage companies with transformative solutions for a prosperous world.”
They provide an aweseme list of venture capitalists and angel funders. It will save you a lot of reasearch time. Here’s the link to the article.
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Will
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