Difference between Angel Investors and Venture Capital
If angel investors acquire equity in exchange for their capital, how are they different from the venture capitalists?
Angel investors have more risk tolerance by funding the startups in their early stages, while the venture capitalist appears in the picture when the business has proven market traction and customer validation.
Generally, venture capitalists are more risk-averse and they abide by principles of growth and performance as they evaluate their potential investments. Venture capitalists are usually members or founders of venture capital firms with a larger capital pool. So venture capitalists can often invest a higher sum in your startup.
On the other hand, the angel investor may be an individual or a part of an angel investment group. However, their investment capabilities might be limited if your food startup scales and requires larger cash injections for continuing your business operations.
Angel investors may or may not provide advice for your startup, depending on your contract or agreements. Because many seed investors are seeking to diversify revenue streams on the side, they often limit their help to financial support.
Instead, venture capital firms might have a major involvement in setting the startup’s management and overall strategy. The goal for venture capital firms is to sell the business in the long term.
What Percentage Do Angel Investors Take?
Angel investors typically aspire to take anything from 20 to 50 percent, according to the Angel Capital Education Foundation. However, the percentage stake your seed investor takes will depend on the negotiation terms that both parties agree on.
Entrepreneurs often debate whether giving up their equity for more capital is a fair or a “good” idea. As another option, startups can also take debt financing from angel investors or they can also offer SAFEs (Simple Agreement for Future Equity).
Again, choosing equity or debt or SAFE will depend on how you perceive opportunities and risks for your business. As you consider debt over equity, some key questions we advise you to consider are:
If you receive equity financing:
- Who’s investing? Do you want them on your team as stake owners?
- Do you have structures in place to comply with state and federal securities laws and regulations?
- How are you planning to manage periodic communication and consensus?
Learn about equity funding alternatives here.
If you receive debt financing:
- How is that debt going to be serviced?
- Do you have the structures in place to pay it back?
- Are you assuming insolvency risk per your cash flow projections?
If you receive SAFE financing:
- Who’s investing and are they adding any other value other than money to your business?
- What do you plan your next round of funding will be and at what valuation?
At an early stage, higher equity or interest could be demanded as you are promising shares in a business that may have question marks around. At the same time, you are offering an opportunity that could result in accelerated profits. Ultimately, the stake that angel investors take will come down to your negotiation skills.
How to Pitch an Angel Investor
We know that pitching an angel investor can be intimidating and scary. It’s not just another presentation. It’s your family, your friends, and your credibility that are at stake.
There’s a lot of pressure … you don’t want to fail, you feel you can’t fail them. At the same time, you also believe in your ideas, your product, and your team. You need that cash!
Outreach Potential Investors
Pitching an angel investor occurs way before your presentation starts. The outreach process is crucial to have enough angel investors to listen and consider your business pitch. What are the fundamental factors that we integrated throughout our outreach communications:
Share your Pitch Deck & Story: What you’ve been up to, what you are creating and why you did so. What motivates you and how are you showing commitment to the business?
Highlight the Problem in the Market: What’s missing right now for you to continue fully developing the business.
Showcase your Opportunity: The request should occur for the potential investor not as a command or a desperate necessity, but instead as a unique opportunity. You can include information you have gathered from past sales, the customer validation process, and market research.
Make a Direct Request for Funding: Ambiguity doesn’t serve any purpose. You want to make a straightforward request and let the potential investors know why you are contacting them.
Invite them as Heroes by being Investors: Humans are driven by other motivations besides money. When making your request appeal to their esteem needs for respect, recognition, status, and freedom. Encourage the angel investor to become the angel or the hero of your story.
“I think a great brand story is what really resonates with the judges and audience so tell your story well. Be authentic, be yourself, and know your why.” Hector Saldivar comments on how his Brand Tia Lupita takes home the Grand Prize win at Natural Products Expo West Virtual Pitch Slam
Planning your Pitch: Depending on the time slot given, you might have between 10 and 15 minutes. An informational but concrete presentation is always preferred. Anticipate the questions or objections that your seed investor might have.
Also, if you have non-accredited investors you are required to include disclosures to acknowledge that as angel investors they are assuming risk and they can lose money.
Address the crucial answers and the possible counterarguments that your investors can come up with. Here are the cornerstones a pitch deck should include:
Key Elements of a Startup Investor Pitch Deck
- Problem: What problem or gap did you identify?
- Solution: What product or service did you create? Can you provide a demonstration of the product or service?
- Past Performance or Traction: What have you accomplished in terms of sales or proof of concept? What have you learned from early versions of the product?
- Backers: Who is currently supporting your business?
- Market Overview: What are the market size, industry trends, and opportunities?
Vision: What do you envision for business development and long-term growth? - Customer Profiles: Who are the people that love and back your business? Why do users care about your product or service?
- Business Model: How does your business generate, deliver, and capture value?
- Competition: Who are the key players in the market you aim to serve?
- Competitive Advantage: What is your startup’s key differentiator?
- Key Milestones: How do you plan to scale the team in the next 12 months?
Team: What relevant domain experience does the team have? Why is the team uniquely capable to execute the company’s business plan? - Strategic Partners: Who can support your business fulfillment externally?
Current Offering and Use of Precedes: How much do you need and for what?
Investment - Benefits: What are the compelling reasons that can attract your investors?
- Long-Term Opportunities: Unexploited markets? Other underserved customer segments? International expansion? What are other key features you plan to add?
Practice your Startup Pitch
An immaculate execution is not required and most likely you will get nervous. What can you do to reduce, suppress or even eliminate that anxiety?
- Practice Lots Beforehand: Having your pitch script down and feeling confident in knowing what you will say will let you focus on connecting with your audience.
- Anticipate the Unexpected: What questions can investors throw at you? Create a consistent plan to back up the information you are providing and foresee their reasoning for the adjacent questions that may arise.
- Polish your Performance: The business pitch involves more than the script. The investors might be looking at other elements of the presentation. As they say, the devil is in the details.
Being on time and having impeccable samples or product demonstrations could infer your professionalism. Recreating a confident tone, voice inflections, and eye contact are crucial.
Concise points on your slides, easy-to-grasp graphs, plus relevant and memorable imagery can put the cherry on the top of your business pitch. As you start to perform the pitch, pay attention to what works and what doesn’t.
If you are still unsure about how to elevate your pitch and excel in your investor outreach, you can schedule a consultation with Crowdcreate’s network of startup experts here.
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