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Raising Finance: Comparing Angel Investors, Venture Capitalists and Equity Crowdfunding

Posted 2 years ago

Raising Finance: Comparing Angel Investors, Venture Capitalists and Equity Crowdfunding
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Trying to find the best source of funding for your business can prove to be a difficult task and has traditionally been one of the most difficult parts of getting an idea off the ground. As a sector that was previously limited to Angel investors and Venture Capitalists, the world of start-up funding has expanded to include a wider variety of sources. 

In this guide we explore three different types of investment and which one is most applicable when raising start-up funds.

An Angel investor or business angel is usually a successful business person who has capital and time to invest in a business. They will often join the board of Directors or will be an observer and sometimes the lead investor. They can provide connections, valuable advice and will often only invest in areas that they have been previously successful in. 

Angels typically invest in a start-up at the seed stage of a company. There is a higher risk associated with angel investments as they are dealing with an unproven business model. It's also probable that the company doesn't have a product and, if they have customers, they might not have significant revenue

Venture Capitalists invest in start-up ventures using funds raised by limited partners such as pension funds, endowments, and high net-worth individuals. They  typically reserve additional capital for follow-on investment rounds. This is helpful for companies that have a long runway or need more time to build out their businesses.

Equity Crowdfunding is where people can invest in unlisted businesses in return for shares via an online platform. Investors can take advantage of government tax incentives such as SEIS and EIS if applicable. It allows companies to get the funding they need to grow, as well as giving investors a chance to share in the success of the business.

Comparing Angels, VCs and Equity Crowdfunding



Source of Funding

How much is invested?

Who is invested in?

How long do investments take?

Angels

Typically invest between £10k and £50k, with an average investment of £25,000. Sometimes they invest more we call these lead investors or Super angels. Angels invest personal finances into startups as opposed to VCs.

Angels tend to invest in earlier stage businesses. But will invest in all sorts. Occasionally they like to be involved with the company and will mentor.

Since Angels are operating alone, or in smaller syndicates with personal finances, they can make decisions quicker than VCs who are more bureaucratic.

Venture Capitalist

VCs invest larger sums than Angels, usually between £2m-£50m. There are also Micro VC funds, which are smaller than a traditional VC fund and focus on seed and pre-seed stage startups.

VCs look to invest in startups with proven business models that are looking to scale (albeit this can vary depending on the focus of the VC firm). VCs are more risk-averse than Angels, so make fewer small investments in startup and seed-stage companies.

 

 

Due to a (typically) significantly larger sum of capital VCs invest in startups, compared to Angels, they spend a longer time to evaluate their involvement with you and complete their research and due diligence

Equity Crowdfunding

Equity Crowdfunding really comes into its own is its capability to aggregate a variety of investment sources into one funding round. So, if that’s £10 from 50 of your friends and family, £10,000 in contributions from your consumers, or a £100k capital injection from a ‘Super Angel investor’, the total value of these sources can result in a substantial investment into your startup.

Equity Crowdfunding is suitable for startups and companies of all stages. But many platforms require you to do most of the marketing, expect that it's your job to get 80% of the funding target and you won’t be disappointed it's no easy ride.

Timescales to raise capital from Crowdfunding varies from platform to platform. Depending on your information available, getting your project live on the site can take from a few days to a few weeks. The maximum time for a project to reach its funding goal is also variable, from a few hours to a few months.

 

Upon successful raise and depending on the site, the time frame for completing the legal documentation and transferring the funds can take some weeks.

 

Author: Sacha Bright & Oliver Murphy

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.

 

Tagged: Equity Crowdfunding Venture Capital Angel Investment EIS SEIS Start-ups



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