Sources of Capital: External Investors
We continue our series on the different sources of working capital for your business by discussing the pros and cons of seeking investment capital from external investors. External investors may come in a variety of different forms, including angel investors, venture capitalists, and sometimes from economic development agencies.
Angel investors are individuals with a high net worth who invest their own money into a company. Their goal is usually to liquidate their ownership within 5 years or so through an initial public offering (IPO) or an acquisition by a larger company. Angel investors can be an absolute boon for a startup company with the funding (often in the $200,000 to $2 million range), practical advice, and business connections they can provide, but they are also probably the most difficult to impress. Angel investors typically look for companies that are in a promising market and have a strong management team, which predictably excludes a large percentage of the companies that seek them out.
The primary difference between angel investors and venture capitalists is the role that they play in their investments. While angel investors take a relatively hands-off approach in running the company, venture capitalists usually demand to have some control over the decisions to be made and hold at least one seat on the company’s board of directors. Another key difference is that venture capitalists typically invest a larger amount of capital into the business (usually $3 million or more) to develop the company’s product and/or build infrastructure as needed. As such, whether a startup company should seek angel investment or venture capital largely depends on how much capital is needed and how much decision making control the company is willing to give to the investors.
For smaller businesses that aren’t on the radar of angel investors and venture capitalists, local economic development organizations can be a good option to look into. These organizations are primarily geared toward smaller startups with smaller capital needs that would benefit primarily from business mentoring, training, and assistance with business location and site selection, employee recruitment, etc. In our tri-county area, 3Core serves as the economic development agency that provides mentoring, small investments through their seed fund, and loans in the $25,000 to $100,000 range.
Deciding what type of outside investor you should target will depend primarily on what your capital needs are, how much control over your company you are willing to give up, and what kind of assistance you need. If the angel investors and venture capitalists aren’t interested in investing in you, your local economic development agency may be the best place to start.
About the Author
Tim Peters is a consultant with Morrison, working primarily in our Business & Accounting Advisory practice. To get in touch with Tim, please find contact information for Morrison here.