One of the biggest challenges startups experience is access to capital. Setting up a new business can present a daunting challenge – particularly when it comes to securing finance to meet your startup costs. Yet startup capital is required for many reasons – for office space, permits, licenses, inventory, product development and manufacturing, marketing or any other expense.
There are several places where you can get the money that your new business needs:
– Personal savings – you can fund your business yourself.
– Bootstrapping – you get the business going with a small investment and then use the profits from each sale to grow the business.
– Bank loan – you can borrow money from a bank.
Unless you are already a wealthy individual, all of these three techniques come with limitations. Therefore, a fourth way to acquire money is by offering investors equity in your business, through which you can sometimes obtain large quantities of money. This money can help businesses with big-start-up expenses or those that want to grow very quickly.
There are different types of equity investor options and understanding the distinction between ‘Seed’, ‘Angel’ and ‘Venture Capital’ is critical to working with and marketing to them.
Seed capital is commonly known as “friends and family” investment. These are typically individuals who know you well and believe in your idea. They invest small amounts of money to help keep the idea alive while you are working feverishly on bringing the concept to life. For the most part, a seed investor is not a professional investor and you should be particularly careful how they structure the arrangement to avoid future problems when you seek other forms of investment.
So with Angel investors, begin with the most important attribute, which is – are they truly professional accredited investors? It’s important to work only with professional investors who know how to manage the transaction fairly. Angel investors have various motives and drivers that will get them to become a partner in a company.
Unlike Angels who work independently, Venture Capital (VC) Funds are managed by a team of people who are answerable to shareholders. The VC group raises a Fund, targeting a specific mission. By the time a potential investment is being considered, there is a council of voices that must be attended to and reasoned with. So the experience is much more institutional, with layers of processes. Smaller VC funds are more streamlined, but in general the difference between working with an Angel and a Venture Capitalist is normally an individual versus a group, and smaller versus larger size of investments.
By Zulekha Huseni
