What’s the difference between an angel investor and a venture capitalist? And more important, where does a startup find them?
In Silicon Valley and beyond, venture capitalists may make million-dollar investments in a promising new company in exchange for an ownership share. As part owners, they often insist on having significant input in the new company’s operations, including a seat on a board of directors.
Angel investors, on the other hand, are individuals or several investors together who write smaller checks — from a few thousand dollars to $100,000 or more — at a crucial time to help get a fledgling enterprise going. They provide seed money, then tend to get out of the way.
Far more startups fail than succeed. So how do small business owners find these early backers? And what terms must they offer to get their support?
“Look for investor as soon as you can. If you’re desperate for money, that discourages them.” — Marcia Dawood
Two experts tackled these questions in a recent State Department webchat on “De-risking the Deal: Angel Investing in Science & Tech Startups.” It was part of the monthly Global Innovation Through Science and Technology series of advice sessions, which can be viewed on the GIST website and on YouTube.
Marcia Dawood of BlueTree Capital Group says early-stage investors are looking for startups that offer “a solution to a big problem.” They may seek a 20 to 25 percent stake for bankrolling the startup, but will not attempt to run the company.
Angel investors want to see that the founders have thought out the next steps after getting out of the starting blocks. “Look at your market. Where will the first customers come from? How can this be scaled up? Does your team have the experience and expertise to grow?” she says.
Angel investors “don’t want to bear all the risk,” says Eli Velasquez of VentureWell, which helps commercialize academic-research breakthroughs. They will want to know details like how much the founders will provide of their own money to fund the startup.
Dawood advises entrepreneurs to ask family and friends to invest. “If you’re not very comfortable [asking], you shouldn’t be [starting] your business.”
She stresses the importance of startup founders “talking to everybody you can — customers, investors, future acquirers. Get feedback and don’t be afraid to ask questions.”
Networks of angel investors have sprung up in many countries and regions.
Angel investors are gregarious by nature, Velasquez says. “They love to hang out with each other” and hear about new opportunities.