What you need to Understand as a Startup Founder on Fundraising
The Different Types Investors you will meet at Different Investment Rounds
What is Angel Investing?
Angel investing is when a wealthy individual (an angel) provides capital to start-up companies. As an angel investor, you can choose to invest in a company for a variety of reasons.
A commonly accepted reason for investing is that you believe in the team, the quality of their product or service, and want to help them succeed. This can be done as a single investment, known as micro-investing, or by investing in a fund/venture capital fund with other investors.
Angel investors will typically invest between $25,000 and $2 Million dollars in companies they believe have potential for rapid growth.
What does an Angel Investor do?
Angel investors serve as the first source of funding for many young companies.
They are typically wealthy individuals who have had success in business and want to use their experience to help build the next big company.
In addition to providing direct funding, angel investors can offer advice and mentorship as well throughout the company’s growth process and beyond — particularly when it comes time for them to raise money from venture capitalists or sell their business.
Angels often provide this guidance on a part-time basis while continuing to run their own businesses or careers; however some angels may choose to become more involved with the day-to-day operations of the company depending on their knowledge and interest in that particular sector.
What is Venture Capital?
Venture Capital (VC) investments are made by larger organizations with greater amounts of capital and higher expectations for returns on their investments than angels would typically have.
Because VC’s need to achieve high rates of return on their investments they often look at later stage companies with proven business models — meaning they have already taken some form of investment or sold a product or service before taking venture capital funding.
This means that VC’s typically look at companies which are 2–5 years old at a minimum.
Even then, these companies will need to meet specific revenue goals and metrics established by the VC fund before they can exit their investment through an IPO or M&A transaction because there’s just too much risk involved when investing in early stage companies with new technology or products/services which haven’t yet been proven in the marketplace. Because venture capitalists have high expectations from these companies it also takes longer for them to exit than it would take an angel investor — sometimes 10 years or more before they see any returns.
What’s The Difference Between Angel Investors & Venture Capitalists?
Angel Investors are often also Venture Capitalists; however venture capitalists tend to focus on younger startups than what an Angel Investor would typically invest in due to risk tolerance.
Venture capitalists generally invest larger sums of money than Angels, but they expect a higher rate of return because they often require majority ownership equity stakes (Seed Stage) or even complete control over governance and management decisions within the company (Venture Stage).
Because venture capitalists have higher expectations from these companies it also takes longer for them to exit than it would take an angel investor.
Angels tend have less control over governance decisions within the companies they invest in because they generally only want equity stakes up front during seed stage investments (although some angels may ask for board seats later on if there are any governance issues which come up).
And unlike venture capitalists who will typically only work with startups once they’ve raised one round of substantial funding, you can still work with angels at any stage — even after you’ve raised several rounds.
What is Seed Stage Investing?
Seed stage investments are made into startups that are in the early stages of building their companies.
The terms of a seed investment typically give you a small equity stake, often just 10–20% in exchange for capital to get the business off the ground.
The advantage of starting with angel funding is that you can still have an impact on the decision-making and strategy of the company while it’s being formed.
This allows you to see whether your business model really works, whether your team is capable of executing on strategy, and if you’re able to gain traction in your market before raising money from venture capitalists.
Because this type of investment comes with less risk than venture capital, individuals who make seed stage investments are much more likely to offer mentorship and guidance as well during these initial stages.
What is Growth Stage Investing?
Growth stage investments are made into companies that have already raised substantial funding and are in the process of scaling their business. This means that they may be looking to expand their product or service offerings, hire new employees, or invest in new technology for their company — all of which require capital.
Because the company has proven itself capable of generating revenue growth and executing on strategy, growth stage investors have far less risk than angel investors do when investing in companies at this stage.
Therefore, they typically require a lower rate of return on their investment than venture capitalists do to justify putting money into these companies.
As a result, growth stage investments can often come with more relaxed terms for the investor and a greater stake in the company — usually 20%-25% equity stakes in exchange for capital being provided to grow the business.
What is a Series A?
A Series A investment is a growth stage investment made by a venture capitalist into a company that has already raised seed capital from an angel investor.
These companies are typically 2–4 years old at the time of raising their first round of venture capital funding and are looking to grow their business further.
The terms of a Series A investment typically give you a larger equity stake (25%-40%) because it’s the first time that many outside investors will be able to get involved with the company.
This higher stake allows you more control over the direction of the company, but also increases your risk substantially because it’s very likely that you will have to provide additional funding for growth in later rounds if the company isn’t able to achieve its goals.
Raising and receiving funding at this stage also requires significant amounts of planning and preparation which means that companies who want to raise a series A round should start preparing at least 2 years before they need to raise it!
What is an IPO?
An IPO is when a private company goes public on an exchange like NASDAQ or HKEX — allowing anyone to buy shares in their company just like they would stocks or bonds.
Historically, most companies needed to go through at least one fund-raising round prior to going public; however in recent years there has been more cases where companies started taking money from retail investors directly without needing any substantial venture capital rounds prior.
This happens most commonly when founders want to retain control over governance decisions within the company and don’t need large amounts of capital for growth — which can be challenging if you intend on taking on venture capitalists as limited partners in your organization!
Between angels, venture capitalists, and private investors the risk and return expectations vary drastically.
As a result, many companies who are generating substantial revenue growth will raise funding from a combination of angel investors and venture capitalists in order to both get capital to grow their business and retain control over governance decisions.
This is known as a hybrid funding round which is usually done in two or three tranches over time instead of all at once — allowing the company to get the funding they need while still maintaining full control over their business.
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
You can connect with me on Linkedin (https://www.linkedin.com/in/alexanderlhk) and let me know that you are a reader of my Medium posts in your invitation message.