Funding My Company: Angel Investors or Venture Capitalists?
One of the ways in which businesses mature and take the next step in their development is by acquiring funding from parties outside the business. Most importantly, partnering with people who are as enthusiastic and visionary about your business idea as you are.
In this article, we’ll talk about two important sources of funding in Singapore: angel investors and venture capitalists. We’ll explain why your company needs funding, the difference between angel investors and venture capitalists, and where you can find them.
Why Does My Company Need Funding?
Many entrepreneurs engage in something called bootstrapping, which is when you build your business from the ground up without any outside funding. The only resources that these entrepreneurs use are their personal savings, revenue from product sales, and a lot of luck.
However, while bootstrapping is a great way to get your business off the ground, it may be difficult to take your business to the next level.
Another reason that your company needs funding is that once you start hiring employees, you need working capital to pay for their salaries. While you might be able to skip paying yourself for a month or two, you can’t stop paying your employees.
What Are Angel Investors?
Angel investors are wealthy individuals that inject their money into a company in exchange for equity in that company. While angel investors do provide the entrepreneurs with advice and mentorship, they are typically quite hands-off regarding the day-to-day management of the company. That said, they do want to see a return on their investment; in other words, their financial contribution is not a donation.
What Are Venture Capitalists?
A venture capitalist is a person or company that invests in a business that has long-term growth potential in exchange for an equity position in the company. Although it can be a person, most venture capital comes from professionally managed venture capital firms. These firms pool money together from venture capitalists and then invest these funds in promising start-ups.
Since venture capitalists inject far more money into businesses than angel investors do (more on this later), they generally seek higher rates of return and are more actively involved in the management of the company. It’s common for venture capitalists to demand a position on the company’s board when investing in it.
When Do They Invest?
Venture capitalists and angel investors typically invest in young, early-stage companies (also known as the “seed” funding phase).
Angel investors are more comfortable investing in companies that are still an idea, while venture capitalists are more risk-averse and look for companies that have either already generated sales or have a proven concept.
The key difference is that venture capitalists invest in extremely high growth companies because their clients expect high returns on their investments.
Angel investors tend to invest in companies slightly before venture capitalists do. This is because angels are usually more interested in mentoring the entrepreneurs, tend to invest in companies out of personal interest or a desire to give back, and want to get involved with promising start-ups before the bureaucracy of venture capital firms enters the scene.
Where Can You Find Them?
If you’ve read this far, you now understand what venture capitalists are, what angel investors are, and at what stage in the company life cycle they invest.
But, where do you find these individuals?
Since angel investors tend to be just one person or, at most, a group of two individuals, the best way and place to find them is through personal connections.
Angels like to invest in companies that are closer to home and that they have a more personal connection with, so start by working your network and talking to people in higher places. Since wealthy people tend to socialize with other wealthy people, it’s important to get involved in those social circles.
Venture capitalists are more difficult to find. Given that they’re usually big firms, you can’t just knock on their doors and ask for money. They come to you; you don’t go to them.
The best way to attract their attention is, frankly, to be successful. Say, if you win prestigious entrepreneurship competitions and generate as much national buzz in Singaporean and international media as you can, you have a good chance of attracting venture capital funding.
Real-Life Success Stories
When we think about the term “angel investor”, we tend to think about the hit television series “Shark Tank” or “Dragon’s Den”, where entrepreneurs pitch their business concepts in exchange for an investment offer from an angel investor in return for equity.
An example of this is Hush Blankets, a Canadian company specializing in weighted blankets for children or adults, scientifically proven to help aid the sleep of those with insomnia or anxiety disorders. After proposing this concept on ‘Dragon’s Den’, they were made an investment offer of $400,000 in return for 8% equity. Currently, Hush Blankets has been successful in using their angel investment to fund research and development to expand their product collection and have exceeded $20 million in sales revenue.
In terms of companies that have received funding from venture capitalists, the well-known vacation rental company Airbnb was contacted by Sequoia Capital in 2009 when Airbnb had merely 2,500 listings on site and around 10,000 registered users. Sequoia Capital became a member of the board with funding of $585,000 for 58 million shares. With Airbnb's services increasing in demand, Sequoia’s initial investment of about half a million became worth $8.4 billion in slightly over a decade.
Overall, in Southeast Asia alone start-ups raised $25.7 billion in funding from venture capitalist and angel investors.
Sprout with Us!
Here at Sprout, we want you to focus on want you do best and let us do the rest! While you source for investors and prepare your pitch, our experts can take care of all your administrative tasks with ease.
For those planning to pitch to venture capitalists, a professional Financial Statement is be helpful. Unsure how to go about that? Our team of chartered accountants can help. Contact us with any questions, we’ll respond within 24 hours.