As you maintain and expand your business, you may find that you don't have enough cash on hand to cover your expenses, and may need to look to outside sources. Two investor options for small businesses are angel investors and venture capital funds. The right choice for your business depends on how much money you need and how involved you want the investor to be in running your company.
Angel investors and venture capitalists have many basic characteristics in common. They both give you money up front, and in exchange they receive a partial ownership shares of the business. It's not a loan, so there isn't a set schedule to pay the money back. Instead, the investor receives a share of your future profits going forward.
An angel investor is a wealthy individual who invests his or her personal assets in your business, while a venture capital fund is a company that professionally manages a large pool of money that they invest in different businesses.
Working with an angel investor is often simpler because you communicate with one person rather than an entire investment fund. If the investor likes your business model and strategic plans, she might write you a check after only one or two meetings. After that, she'll likely leave you to run your business.
The amount of money you could receive from an angel investor is usually less than what you could get from venture capital, however. An angel investor usually contributes between $25,000 to $1.5 million to a business, according to the Kauffman Foundation, while venture capital funds typically invest between $500,000 and $5 million. Because venture capital funds invest larger amounts of money, they have a more formal evaluation process for choosing investments, which could take months to complete. They may also ask to have a say in the decisions you make for your business going forward.
Choosing the Right Option
If you need a small amount of money and want to keep company decisions in your control, an angel investor is probably the better option. This person will likely approve investments quickly and leave you to make all your business decisions on your own.
Venture capital is more useful if you need a large amount of money, and it can also be useful if you want help managing your business. These companies often specialize in different industries; you might be able to find a fund that's worked with companies like yours before. The advice they provide may be just as valuable as the money.
Both angel investors and venture capitalists have their advantages and disadvantages as investor options for small businesses. No matter which you choose, they're a great option for helping your company expand.