Understanding start-up business options: Angel investors, VCs and crowdfunding
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Posted: Fri 26th Jan 2024
Choosing the right business start-up funding can be challenging, as there are several options available, each with its pros and cons. Three sources of finance that you're likely to consider are angel investment, venture capital and equity crowdfunding.
If you're not sure about any of these, don't worry. Below, we define what they are and help you weigh up the three options and understand how they can work together.
Start-up business funding: Definitions
What is an angel investor?
An angel investor is someone who invests as an individual or as part of a syndicate (a group of angels). They put their money into businesses, and occasionally provide experience and knowledge to help start-ups grow and achieve success.
What is a venture capitalist (VC)?
VCs invest in start-ups using funds raised by limited partners such as pension funds, endowments and high-net-worth individuals. They also bring with them a significant amount of knowledge and experience to the companies they invest in.
What is equity crowdfunding?
Equity crowdfunding enables a group of investors (the ‘crowd’) to invest capital through an online crowdfunding platform, in exchange for equity (a stake in the business).
As opposed to a single investor, or a small group of investors, this form of fundraising can involve hundreds or thousands of people in a single raise.
Differences between angels, VCs and equity crowdfunding
How much they invest
Angel investors
Angels typically invest between £10,000 and £50,000 of their own money into start-ups. According to the UK Business Angels Association (UKBAA), the average business angel invests £25,000.
If angels invest as part of a syndicate, a business might be able to raise larger amounts of finance above £1.5 million.
VCs
Since they are drawing from a large pool of resources, VCs invest larger sums than angels, usually between £2 million and £50 million. This tends to be private or public money, invested through managed funds.
There are also micro VC funds, which are traditional VC funds on a smaller scale. These focus on seed and pre-seed stage start-ups, typically investing between £20,000 and £400,000.
Equity crowdfunding
In the UK, start-ups can raise up to the equivalent of €8 million on equity crowdfunding platforms like Seedrs.
However, where equity crowdfunding really comes into its own is its capability to aggregate a variety of investment sources into one funding round. What that means is that you don’t need to turn away money from angels and VCs.
So, if that’s £10 from 50 of your friends and family, £10,000 in contributions from your customers, or a £100,000 injection of capital from a VC, together, these different sources of finance can represent substantial investment for your start-up. In total, it can even exceed the €8 million as part of a wider round.
VIDEO: How to find, meet and pitch to angel investors
Chris Goodfellow guides you on identifying and approaching potential investors and shares tips on creating a target list, writing compelling emails and crafting a pitch deck:
Who they invest in
Business angels will generally invest in earlier-stage businesses, while VCs look to invest in start-ups that have proven business models and are looking to scale. (Although this can vary, depending on the VC firm’s focus).
VCs are more risk-averse than angels, and getting a return on their investment (up to 40 times the amount they put in) means being highly selective. As a result, they make fewer small investments in start-ups and seed-stage companies.
Equity crowdfunding, on the other hand, is suitable for start-ups of all stages. Raises on Seedrs start at a £50,000 minimum and extend up to amounts in the millions of pounds. So whether you’re looking for seed capital or Series A finance, you should be able to raise investment.
In 2018, for example, the diverse nature of the investor community meant there were successful fundraises across 17 different sectors and 12 different countries.
Involvement in your business
While angels may provide advice by taking a role on the board and introducing you to important contacts, their primary responsibility is financial support. So, their degree of involvement depends on their own preference and whether they like to be passive or active investors.
Active angels will typically play a significant advisory role and will be actively involved with your business after they've invested. However, passive angels, usually as part of a group of investors, aren’t expected to have any direct involvement in the business they’re helping to fund.
By contrast, VCs will always tend to demand a high level of involvement in your start-up. Often this means taking a seat on the board, so they can have more control over the high return they’re seeking. While this can benefit your business tremendously, the VC’s control and oversight on your management can be a strain.
Crowdfunding enables thousands of supporters to invest in your business. However, this large shareholder base usually results in a heavier administrative burden.
VIDEO: How unique branding can secure crowdfunding for start-ups
Matt Dyson, co-founder of Rockit, explains how to set up your business with eye-catching branding so you can secure the best outcome with crowdfunding. Find out how to prepare your campaign from the pitch deck and video to the financials:
How long it takes to raise capital
Angel investment and venture capital
Since angel investors operate alone (or in smaller syndicates), with personal finances, they can make decisions quicker than VCs, who can be more bureaucratic.
Because VCs tend to invest significantly larger sums compared to angels, they spend a longer time evaluating their involvement with your business and completing their research and due diligence.
Crowdfunding
Timescales vary from platform to platform. However, as a rough guide, for a company raising for the first time, the pre-campaign will last at least three to five months. This process involves:
preparing and refining your business plan
applying for the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS)
creating your video and documents
You’ll also start building a network of potential investors and reaching out to your community, customers and family, warming them up as early investors.
It’s crucial to publicly launch your crowdfunding venture with at least 20% of your target raised. Not only is this something crowdfunding platforms generally stipulate, but it shows momentum and compels crowd investors to invest in your venture.
Once a platform has accepted your funding campaign, it will take about two weeks to review and work with you towards a private launch (which can last 14 days). After this, your campaign will launch publicly for up to 40 days.
If your campaign is successful and reaches its target, it will take a couple of weeks for the platform to transfer the amount raised, as it needs to complete its due diligence.
Looking for finance for your business?
Whether you're seeking funding for a start-up business or exploring your options, choosing the right financial partner is crucial.
Use our Funding Hub tool to get personalised recommendations based on your unique financial needs.
Pros and cons: Angel investors vs. VC vs. crowdfunding
Choosing between angel investors, VCs and crowdfunding depends on what your start-up needs, its stage of growth and how comfortable you are with investors being involved in your business.
Here are the main pros and cons of each start-up business funding option:
Angel investors
Pros
Access to expertise: Many angel investors bring valuable industry experience, mentorship and business connections to help your business grow.
Flexible investment terms: Angels are often more willing to take risks than traditional lenders, and can offer more tailored funding options as a result.
No pressure to repay: Unlike loans, angel investment typically doesn't have to be paid back immediately, as funds are exchanged for equity.
Support for growth: Angels often provide follow-on funding, making sure you have the resources to scale your business.
Boosted credibility: Having an angel investor on board can enhance your business's reputation and attract other investors.
Cons
Loss of equity: Taking angel investment means giving up a share of ownership, which can lessen the amount of control you have over your business.
Potential for conflict: Disagreements with investors can arise over the business's direction or strategy.
Limited funding amounts: Compared to venture capital, angel investment often involves smaller sums, which may not cover significant needs.
Higher expectations: Angel investors will expect a return on their investment, which can add pressure to achieve profitability quickly.
Competition for attention: If your investor is involved in a number of ventures, you may not receive as much time and support as you need.
Venture capital (VC)
Pros
Large funding potential: Venture capital provides significant financial backing, ideal for scaling quickly and entering competitive markets.
Strategic guidance: VCs often bring industry expertise, strategic advice and connections to help drive your business's growth.
No immediate repayment: Like angel investment, VC funding is equity-based, so there's no debt to repay upfront.
Growth mindset: VCs are accustomed to high-growth businesses and offer support which is tailored to ambitious plans for scaling up.
Increased visibility: Having a reputable VC firm as a backer can boost your credibility and help you win more investment.
Cons
Loss of control: VCs typically demand significant equity and may require a say in business decisions, potentially reducing your level of control.
High expectations: VCs seek substantial returns, and so might put pressure on your business to achieve rapid growth and profitability.
Time-consuming process: Securing venture capital involves extensive due diligence, negotiations and pitching, which can be lengthy and demanding.
Exit pressure: VCs often expect an exit strategy, such as selling the company or going public, which might not fit with your long-term vision.
Selective investment criteria: VCs tend to invest in high-potential industries, leaving smaller or niche markets less likely to secure funding.
Equity crowdfunding
Pros
Access to a large pool of investors: Equity crowdfunding allows you to raise funds from a broad audience, including people who believe in your vision.
Brand exposure: Campaigns can double as marketing, raising awareness of your business while attracting investment.
Retain control: Many crowdfunding platforms let you offer small equity stakes, which limits the influence of individual investors.
Validation of your idea: A successful campaign demonstrates market interest and builds confidence in your business.
Flexible funding: Equity crowdfunding platforms often allow businesses to set their funding goals and timelines.
Cons
Takes time: Creating and promoting a successful campaign requires significant effort, from developing pitches to engaging potential investors.
Diluted ownership: Raising funds through equity crowdfunding means giving up shares in your business, potentially reducing your stake.
Public scrutiny: Campaigns expose your business's plans and performance to the public, which risks harming your reputation.
Platform fees and costs: Crowdfunding platforms typically charge fees on the funds raised, reducing the total amount available for your business.
Follow-up requirements: Once your campaign ends, you'll need to manage communications and updates for a potentially large number of investors.
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