Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Essential Element #3: Know the Funding Community- Angel Investors vs. Venture Capitalists.

There are various funding options available to entrepreneurs. This includes self-funding as well as funding from third-party equity sources. The funding options include bootstrap, angel, venture capital, and corporate partner funding. The bullet item list below outlines these various funding sources, the funding stage, and typical associated funding ranges.

  • Founders, Friends, and Family: Pre-Seed, Seed and Start-up; $25K – $100K
  • Individual Angel Investors: Seed and Start-up; $100K – $500K
  • Angel Groups: Start-up and Early Stage; $500K – $2.0M
  • Venture Capital/Corporate Partner Funds: Early and Later Stage; $2.0M and Up

For purposes of this article we will focus on angel investor and venture capitalists.

Angel Investor vs. Venture Capital Funding

Venture capital investing is generally the most well-known type of start-up investment services available in the market. Although many entrepreneurs are aware of venture capitalists and associated venture funding, many are not aware of the process, issues, and concerns that arise when engaging with venture capitalists. As a way of an introduction, the following bullet items outline some of the basic differences between angel investors and venture capital firms.

  • Personal Background: Angel Investors: Entrepreneurs; Venture Capitalists: Money mangers
  • Money Source: Angel Investors: Own money; Venture Capitalists: Fund provider’s money
  • Firms Funded: Angel Investors: Small, early-stage; Venture Capitalists: Medium to large, Later stage
  • Amount of Investment: Angel Investors: Small; Venture Capitalists: Large
  • Due Diligence: Angel Investors: Minimal; Venture Capitalists: Extensive
  • Contract: Angel Investors: Simple (10 pages); Venture Capitalists: Comprehensive (!00 pages)
  • Monitoring of Investment: Angel Investors: Active, hands-on; Venture Capitalists: Strategic
  • Exiting of Firm: Angel Investors: Of lesser concern; Venture Capitalists: Very important
  • Rate of Return: Angel Investors: Of lesser concern; Venture Capitalists: Very important

As noted above, the underlying characteristics that delineate angel investors are much different than that of venture capital firms. This is primarily a function of nature of the organizations and background of the two types of investors. Where angel investors generally invest smaller amounts of money with the goal of facilitating the start-up company’s move to the next level of third-party investment from venture capital firms, venture firms generally invest large sums of money with the goal of cashing out in three to five years through an initial public offering (IPO) or through an acquisition by a large corporation. The following bullet items provide a comparison of the investment statistics between angel investors and institutional venture capital financing sources.

  • Funding Sources (U.S): Angel Investors: 234,000; Venture Capital Firms: 1,830
  • Annual Investments: Angel Investors: $25.6 B; Venture Capitalists: $35B
  • Total Transactions: Angel Investors: 51,000+; Venture Capitalists: 2,910
  • Seed Stage Transactions: Angel Investors: 25,000+; Venture Capitalists: 128
  • Mean Investment: Angel Investors: $500,000; Venture Capitalists: $8.9M

As noted above, statistically, angel investors focus much more on seed and early stage company funding. With over 51,000 total transactions a year, and over 25,000+ transactions in seed stage companies, entrepreneurs are in a much stronger position in receiving funding from angel investors than venture capitalists, which only funded 128 seed transactions in 2005. So, as outlined, with 234,000 independent angel investors in the US and only 1, 830 professional venture capital firms, entrepreneurs should focus their seed stage funding efforts on securing money from angel investors.

In addition, the interaction between the angel investor and the start-up company versus that of the venture capital firm and the start-up company are generally very different. Where the angel investor(s) are more nurturing and patient toward the start-up company, the relationship between venture capitalists and the start-up firm can many times be better characterized as an “adversarial” relationship based on meeting financial projections with unrealistic expectations. It has been my experience that the underlying difference between the two relationships is that many venture capitalists are MBAs from top business schools with little or no experience in developing a start-up from the ground up. They concentrate on the “should be projections” of the financial statements, as opposed to the realistic issues in developing a business. Given this difference, and the necessity of working with the venture capital community, it is highly recommended that entrepreneurs and their start-ups work with venture capitalists that have “hands-on” start-up experience. This will facilitate a much more mutually beneficial relationship between the two parties, the entrepreneur and the investor.

The information outlined in this article comes from my new book entitled “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up companies. This book is available at www.carlsbadpublishing.com.

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February 9, 2009 - Posted by | Venture Capital | , , , ,

1 Comment »

  1. Thank you for the valuable information in the essential information articles. Even though your background is more technical in nature and my ideas for a new start up are in the hospitality area, the information is relevant and addressed a lot of my questions. A great place to start my research!

    Regards,
    Mary

    Comment by Mary Denson | June 15, 2009 | Reply


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