Looking for a venture capital firm?  An angel investor?

Most startup businesses begin the funding process by counting on the so-called three F’s: family, friends, and fools.  This is done simply by talking to each of them that may want to invest and giving them a first opportunity.  Banks and government funding in the form of grants or loans can be the next option for many business owners.  However, obtaining government funding is a long and arduous process.  In addition, many entrepreneurs need more money than banks or traditional financing institutions are willing to provide given the risk.  Thus most small business must turn to other sources for additional funds.

The process of getting the next round of funding is usually composed of many similar initial discussions promoting the idea of your company.  A great entrepreneur considers every conversation, however unrelated to the business, a chance to further his success.  This is because from experience he knows that many times unexpected people are able to help in some manner.  That said, there are significant differences between an angel investor and a venture capitalist.  You will probably not meet great success without tailoring your presentation to your preferred investment type.

Venture capitalist vs. angel investor

One of the most important differences between an angel investor and a venture capitalist is the funding they intend to use.  An angel investor uses his own private money.  On the other hand, a venture capital firm raises money from wealthy individuals.  This difference profoundly affects the motivations and actions of each type of investor.

What motivates someone to be an angel investor?

Since an angel investor is providing funding with his own money, the typical angel is a wealthy private citizen with prior success in business.  Many times the angel has experience building a company.  Some of these angels invest in new startups for the thrill of entrepreneurship.  Others want to help a fellow budding entrepreneur meet success.  Still others want to stay current on the latest developments in a particular field.  Or perhaps they are infatuated with a particular idea.  

How does this affect the actions of the angel investor?

Because of the diverse reasons for investment, angels have differing expectations for the return on their money.  They recognize startup companies are high risk, and will want to justify the risk with commensurate returns.  It is not uncommon for angels to require a 25% return each year.  Others may want ten times their investment in a specified time period.  However, because many invest for reasons not purely financial, they are usually willing to be more flexible on the structure, terms, and length of a deal.  Many angels do not expect a return on their investment for five to seven years, though this can vary.

In presenting a business to obtain funding from an angel investor, you should be sure to discover their motivation for investing.  Some of them will want to be in an advisory or coaching role, while others may want to be similar in function to a partner.  The least sophisticated investors, though, may be hard to reach after a funding deal is complete. 

A solid management team with a proven track record, a prototype, and well thought out financials can significantly improve your chances of capturing both their attention and money.

How does this affect the actions of a venture capitalist? 

Since they are required to report to their investors and typically have a lot of experience with startups, venture capitalists are not as lenient as angel investors in structuring a deal or in the terms.  Many entrepreneurs are taken aback by their directness and inflexibility, but you should keep in mind that their objective is to fund the company with potential for the returns they are seeking.

The amount of funding and the industries preferred vary by firm.  Most will have clear preferences, and you should not approach them if you do not have a business in that area.  In addition, most venture capital firms will invest no less than several million dollars in a single deal.  If you are looking for less money, angel investor would be better suited to your needs.