Weighing up different finance options when starting up your own business can be stressful. If you’re thinking of seeking funding from an investor, it can be really difficult to know which type of investor you should consider and why.
That’s why we created this guide, explaining everything you need to know about different types of investors for your business startup. In this article, we answer commonly asked questions such as ‘What’s the difference between an Angel Investor and a Venture Capitalist?’, ‘What type of investor is right for my business?’ and ‘How much investment can I expect?’.
What is an Angel Investor?
An angel investor works alone. They’re often a wealthy individual (or group of individuals) with an interest in investing their own money into a business. This money can come from any source, they may be using their own personal savings, they may have recently sold their own company or perhaps inherited finances.
Angel investors tend to invest early on in a new startup’s venture. Typically, they make an investment in exchange for either equity in the company or a convertible bond, which can be exchanged for a specific number of stock or equity shares in the future.
The amount of money an angel investor decides to invest in your company can be anything from a small amount to help you get started, or even a large amount that will significantly help you to grow your business. These types of investors can be anyone, from a friend or family member wanting to help you out to an accredited investor with experience in evaluating and investing in new startups.
What’s a Venture Capitalist?
Venture capitalists on the other hand are very different from angel investors. Venture capitalists are often well-connected, professional investors with a wealth of knowledge and experience in developing businesses. They’re usually representative of a company or organisation as opposed to an individual.
These professional investors are responsible for helping you to develop your business. The funds they invest come from a wide range of sources, such as foundations, pension funds and other organisations. Venture capitalists can be split into two main types, ‘limited partners’ (LG) who commit capital to the venture fund and ‘general partners’ (GP) who are responsible for managing the venture capital fund in order to help your business develop.
What sort of businesses do angel investors and venture capitalists invest in?
Angel investors typically invest in small start-ups who are in the early stages of setting up their business. Venture capitalists on the other hand, often invest in high-risk ventures that have already established their business and have potential for exponential growth.
One of the key differences between angel investors (AI) and venture capitalists (VC) is that VCs tend to invest much larger sums of money. Therefore, VCs have to be certain that the company they’re investing in has a good track record and a potential for success.
How much investment can you normally get from an angel investor?
Angel investors typically invest anywhere from £5,000 to £150,000 in a single venture. The UKBAA recently found that the median initial investment an angel investor makes is £25,000, with a median follow-on investment of £7,500. However, this can vary massively, and the total amount invested can sometimes be up to £1 million.
How much do VCs invest?
Unlike angel investors, venture capitalists tend to invest large amounts of funds into businesses. This is almost always more than £1 million. Venture capital is a great option for businesses who are looking to scale big.
How much time do angel investors invest in your business?
A recent study conducted by the UK Business Angels Association (UKBAA) found that the average duration of an angel’s investments is 6 years, and during this time they spend approximately 1.6 days a week on the business they invested in.
We hope this article has been useful in providing you with everything you need to know about the difference between Angel Investors and Venture Capitalists. If you’re in the process of considering finance options such as these, we wish you the best of luck in your efforts.
Alternatively, if you don’t think an investor is the best route for your company, why not check out other business funding options here?