Everyone knows the Cinderella story by heart. An intrepid protagonist with big dreams works tirelessly every day and meets a fairy godmother who offers her the opportunity to go to a ball, meet a dashing prince, and live happily ever after. There’s a similar rags to riches story in the small business community too. Just swap out the protagonist with an entrepreneur, the fairy godmother with a venture capitalist or angel investor, and the ball/prince/happily ever after ending with financial backing/an IPO/overnight success boom that turns your brand into a household name.
Things could have turned out quite differently for Cinderella had her fairy godmother not understood exactly what she needed. For rising entrepreneurs that need funding, it’s important to determine whether your startup is better suited to work with a venture capitalist or angel investor. Take a closer look at the differences between these two types of professionals and what they have to offer your startup to ensure it receives its own fairytale ending.
What do they do? Venture capitalists, also known as VCs, back high-growth companies early into their startup journey with equity funding. Instead of paying VCs to get their backing, entrepreneurs provide these investors with a stake — typically shares — in the company or an equity position. The capital gives the startup the ability to succeed and gives the VC an active role in the business.
Which entrepreneurs/startups should work with them? The younger and more specialized the business, the better. VCs often invest in tech-based companies like apps and software startups. They also tend to favor businesses with strong management that show signs of steady growth in an emerging market.
What do you do if they’re interested in funding your business? Being offered venture capital is a big deal. It means that your business has the potential to yield huge returns and/or to be quickly sold to public firms. Make sure you have a good idea for your business, that the market your startup is in is large enough for a strong return on capital, and give them something in return for their early investment. Additionally, inquire about the typical check size as this will determine the kind of VC you reach out to for funding. Entrepreneurs that need less than $1 million, for example, should reach out to micro VCs as they have funds with $10 to $50 million.
What do they do? Angel investors come in a wide variety of professions, like doctors, lawyers, and existing entrepreneurs, and want to invest their wealth into your business. Much like VCs, they also want equity in your startup. Unlike VCs, they can’t invest millions into your business. Typical angel investments go from $25,000 to $100,000 per company.
Which entrepreneurs/startups should work with them? You don’t have to be a brand-new startup to work with an angel investor. If you’re fairly established with some revenue, but still need extra capital, it’s a good idea to reach out and introduce your business.
What do you do if they’re interested in funding your business? Angel investors want to see your business to succeed since they’re helping fund it out of their own pocket. Entrepreneurs that pique their interest are always ones that are passionate about their company and understand how it can succeed over time within its market. Be prepared to explain your business plan, elevator pitch, and executive summary. This shows that you’re thinking about the startup’s past, present, and future — and also shows angel investors the kind of valuable role they can play in your company’s success.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.