Understanding finance: Angel investors, VCs and crowdfunding
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Posted: Fri 26th Jan 2024
There are a variety of ways to fund your start-up, and all have their pros and cons. Knowing which one is right for your business can prove a challenge. 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.
Useful 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.
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.
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?
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