Back again, folks! Over the past few columns I’ve written on the business startup process and we’ve burned a good amount of ink discussing various funding approaches: bootstrapping, searching out and applying for grants and loans, and crowdfunding. That gets us to the last stop along this trail: equity funding via angel investors or venture capital (VC).
Although often lumped together under the single banner of equity funding, angel investing and VC each offer distinct advantages and drawbacks. Let’s dive into the pros and cons of each.
Venture Capital:
Venture capital firms are institutional investors that invest in businesses with long-term, high-growth potential. Most frequently, the investment arrives in exchange for equity ownership of the business. The key takeaway here is that VC firms are generally looking to invest in scalable companies with the potential to grow fast in a relatively short time frame. If you’re operating a business that is making small-batch, handmade, artisanal goods, VC firms most likely won’t have much interest in funding your venture. Because of the high risk nature of VC investing, VC firms need to swing for the fences with every deal in hopes of explosive growth. They need to land that one whale that will cover their losses on their other investments that just didn’t pan out.
Assuming you have a scalable business idea, let’s run through some things to consider associated with VC funding:
Pros:
Substantial Capital Injection: VC firms typically offer significant levels of funding, which can provide the necessary financial leverage for a company to scale rapidly. This infusion of capital enables startups to hire top talent, invest in research and development, expand sales operations, etc.
Strategic Guidance and Networking: Beyond money, venture capitalists often bring industry expertise, strategic insights, and extensive networks to the table. Their guidance can help startups navigate challenges, determine pivotal business decisions, and make key introductions.
Street cred: Securing funding from reputable VC firms can enhance your startup’s credibility in the eyes of potential customers, partners, and future investors. It serves as validation of your business model as well as your team’s capabilities and potential, which can then open doors to additional opportunities.
Cons:
Loss of Control: In my mind, this is the big one. Accepting VC funding usually entails surrendering a certain degree of control over your company. Venture capitalists often demand board seats and exert influence on key business decisions, which may clash with your vision.
High Expectations and Pressure: VC-backed startups often face pressure to achieve rapid growth and deliver substantial returns on investment within a relatively short time frame. If you’re taking on VC funding, make sure that your timeline aligns with your funders’.
Exit Pressure: Venture capitalists usually invest with the expectation of reaping substantial returns, typically through having the company bought out by a bigger company. Again, this can create tension if your timeline and vision do not match your investors’ expectations.
That’s the overview of VC funding. Let’s now look at angel investors, a close cousin of the VC world.
Angel Investors:
Angel investors are affluent individuals who provide capital to startups in exchange for equity stakes, often in the early stages of development. Sometimes a one-on-one relationship with an investor is more appealing, let’s explore the pros and cons of angel investors:
Pros:
Flexible Terms and Speed: Angel investors often offer more flexibility in terms of deal structures and investment terms than VC firms. This agility can speed up the fundraising process, allowing startups to secure funding faster and with fewer bureaucratic hurdles.
Personalized Support and Mentorship: Angel investors often take a hands-on approach to supporting the startups they invest in, providing guidance, mentorship, and access to their networks.
Alignment of Interests: Unlike institutional investors, angel investors typically have a more patient outlook and may be willing to support the startup’s long-term vision without imposing stringent growth targets or exit timelines.
Cons:
Limited Capital: While individual angel investors can provide valuable early-stage funding, their pockets generally aren’t as deep as those of VC firms. This may limit your ability to complete large-scale growth initiatives or weather unforeseen financial challenges.
Potential Lack of Expertise: Not all angel investors possess deep industry knowledge or operational experience relevant to the startups they back. Be prepared to take advice or guidance with a grain – or two – of salt.
Risk of Disagreements and Disputes: Angel investments are often made on an informal basis, relying heavily on trust and personal relationships. However, disputes over strategic direction, financial management, or other matters can arise, particularly if there is ambiguity in the initial agreement. Be sure to consult your business attorney before signing anything!
So, there we have it! Between this column and previous ones, we’ve covered the basics of funding options for businesses. Bootstrapping, grants, loans, crowdfunding, and equity funding can all offer valuable sources of funding for businesses, each with its own set of pros and cons. The main nugget of guidance with all of this is that business owners should carefully evaluate their funding needs, objectives, and compatibility before taking on debt or investment partners. Success usually lies in finding the right balance between access to funds, strategic guidance, and alignment of interests. If you can strike that balance, you’re in a good position!
Mark Pond, MILS, has been the Business Research Librarian with the Spokane Public Library since 2006, and, before that, worked in similar capacities for the Seattle Public Library and the University of Washington Libraries since 1998. Mark has led the effort to develop Spokane Public Library into a nationally recognized leader in the field of business research.
