Okay, BossChix time to get some facts about entrepreneurship and funding. If you’re like many aspiring women entrepreneurs, you have a great idea or product but you may be less knowledgeable about the funding necessary to get your product to the mark. You may have some start-up funding, but as your business grows you will likely need additional money to take your business to the next level. You’re in the right place – let’s learn a few things about angel investor vs. venture capitalist or VC funding.
Angels versus venture capitalists: who is better for your business and why would you choose one over the other? According to the National Association of Women Business Owners, women-owned businesses generate $1.7 trillion in sales! (Yes, trillion with a T.)
With female entrepreneurs seeking funding more than ever before — in fact, a whopping 59% of them — it’s critical to learn more about funding options. Since 31% of women who do seek funding are successful, it’s clear that women are increasingly dominating the entrepreneurial world — and there is still room to grow.
Now, let’s dive into the different types of funding that entrepreneurs may seek.
Angel Investor Funding
Angel investors typically get involved in the early stages of a company. Typically, an entrepreneur would be looking for an angel investor before they release their final product or service. With this funding, it occurs before the company goes to market. The check size is typically under $1 million, with the average investment being between $25,000-$100,000. This level of investment is perfect for a brand new company that needs extra capital to get to market and finish development.
Angel investors are typically individuals that are looking to invest in people that they know — or ideas that they’re passionate about on a personal level. They have different responsibilities than their counterparts. Angels only offer financial support — not operational support — unless otherwise specified. Angels also perform a lot less due diligence on the company and entrepreneur, as they are just individuals with a lot less manpower and money.
Venture Capitalists (VC Funding)
Ordinarily speaking, venture capitalists invest later in the company’s life. The company generally has to have been around for a couple of years and have significant customers in order to garner a VC investment. Venture capitalists invest a much higher amount in companies, as VCs are backed by a group of professional investors.
The average investment for venture capitalists is about $7 million, which is significantly higher than the amount that angel investors invest. This increase in capital also demands a lot more credibility; entrepreneurs need to prove that their company is worth the investment and that their company can provide the ROI that VCs are looking for. In general, VC funding is not part of initial or start up funding for a company. VC funding is used to take your business to the next level.
Venture capitalists have many more responsibilities in the businesses in which they invest. They provide networking, executive staffing, and they help with the company’s strategic vision. Venture capitalists also perform much more due diligence than angel investors. They typically spend up to $50,000 just to vet and understand an entrepreneur and their company, due to the fact they have responsibilities to their investment partners.
Let’s go over a couple of examples. Say you are opening a bakery shop and need some extra financing; neither of these options are for you. Angels and VCs are looking to invest in high-growth companies that can offer significant returns over a 5 year period. In this example, you would want to go to a bank, credit union or the SBA (Small Business Association) to get a small business loan. This will make sure you have the finances to get up and running, but make sure your business plan is amazing!
Angel Investors Helped Jeff Bezos’ Amazon
Jeff Bezos was able to secure $30,000 from 20 different investors way back in 1995 as an angel investment in Amazon, which helped him scale up the company. Then in 1996, Bezos was able to acquire $8 million in VC funding from Kleiner Perkins. This example shows that a company typically acquires angel funding before VC funding, and that the amount from angel investors is much less than VC funding.
The Skimm Secured $28 Million in VC Funding
Prolific female-centric newsletter The Skimm has grown to over 7 million subscribers, and they’ve raised $28 million in VC funding in the process. Cofounders Danielle Weisberg and Carly Zakin lead the charge, most recently pursuing Google Ventures as a significant funding source. And while the future of The Skimm’s product expansions are unclear, what is clear is that their story supports the paradigm for VC funding: build a great product with active customers, then seek financing to help it grow.
So, what is the best option for your company? It all depends on your company and situation. Go to your local SBA office. — or find a mentor in your local entrepreneurship community — to help guide you through the process.