One of the biggest challenges facing early-stage technology companies is seed funding. Once you’ve honed in on a concept, assembled your team, and hammered out a business plan, the next step is securing capital to make it happen. This may seem simple, but it can be one of the toughest tasks facing an entrepreneur. Spending a few minutes assessing your options could save you time and secure you money.
Angel vs. Venture Capital
The initial inclination for many companies seeking funding is to go after venture capital. VC firms are a good source for investment, but they typically look for advanced-stage ventures. For early-stage companies, angel investment is an attractive alternative. As of 2006, Angel investing is a $20 billion industry in the U.S. Over half a million companies are started in this country every year. Angels invest in about 50,000 of these ventures. In contrast, VCs invest in about 200 –- or two percent –- of these start-ups.
When it Comes to Investment, Size Matters
An angel round typically ranges between $250,000 and $2 million; VCs investments are generally $5 million or greater. By starting with smaller investments by angels, entrepreneurs can meet key milestones and build value in the company before going after VC funding. An initial round of $1 million –- or even $500,000 –- can go a long way towards this effort.
To Market, To Market
New companies typically take seven to 10 years to mature. If your to-market cycle falls in this range, it may be too soon for venture capital. VCs have aggressive timeframes, generally seeking laudable returns in three to five years. Angels are more patient investors. They also have shorter funding cycles –- two to four months. VCs average six to nine months.
A Vested Interest
Angels are more than wealthy individuals with a penchant for risk. They are often seasoned entrepreneurs, well-versed in how to set up and grow a successful business. An angel’s interest in a company extends beyond the return in investment. They can serve as mentors or advisors to a company and assist in business planning and execution. However, don’t be fooled into thinking they don’t care about returns. Angels are savvy investors who will put a company through the hoops to determine its risk-reward ratio.
Location, Location, Location
Angel investors tend to invest locally, typically within 50 miles of their home. This can be advantageous when economic incentives exist for keeping tech companies in the community. It can also mean better odds of being funded. VCs primarily work at the regional and national level. The process is highly competitive and the pool of candidates much broader.
Calling All Angels
The most-often heard complaint from entrepreneurs is that they can’t access angels. True, it’s easier to find VCs –- an Internet search will yield dozens of queries. While angels don’t hang a shingle outside their door advertising their portfolios, accessing them may be easier than you think. Talk to people in your market space. Tap your lawyer, CPA, and business colleagues –- you may be surprised who knows who. And network, network, network –- attend entrepreneur functions, join a trade association, participate in investment forums.
There are organizations, like Washington Technology Center, that help companies access angel investors. WTC’s Angel Network screens deals and funnels them to local angel groups. It also helps new groups get started, especially in areas outside of Seattle. WTC also trains entrepreneurs how to present to angels and what to look for in a funding partner through workshops and seminars. Finding an angel is like finding a job –- it’s all about the connections. And, with a little work, you can be the standout candidate.
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