Tag Archives: angel money

Need Startup Money? Meet The Top Venture Capital And Angel Investors

To get your business going you need money. Probably plenty of it. If you’re buying an existing business, you can make a cash down payment and pay off the seller over time. But when you’re starting your own business, it’s likely you’re going to need access to 100% of the startup capital needed to get going.

This may surprise you but the lion’s share of startups are funded either with the entrepreneur’s own money, or with money from friends and family. Failing that, new businesses look to SBA loans and conventional bank loans. But those loans are tough to get for startups these days, and they require significant collateral. And even if you were able to get an SBA or bank loan, likely they’d only loan you at the most 75% of what you need to get going. More likely it’d be closer to 50-60%.

So say you have $200,000 in startup costs. Then you, being a lucky person, get the go ahead for a bank loan that’s 60% of your costs. Before you can draw on that loan, you still need to show that you’ve put the remaining 40% in your business. For example by showing $80,000 worth of receipts for equipment you bought.

bigstock-Funding-White-Road-Sign-54048721Bottom line is you still need to find that $80,000. Where else can you turn? Venture capital (VC) firms.

VC comes from professionally managed funds that are looking to make equity investments in emerging growth startups. They purchase a stake, anywhere from $25,000 on the very low end to upwards of $10 million, in selected industries where they have expertise.  Their plan is to sell their investment within a few years and return their outside investors’ money, with a profit.

Professional VCs have very high standards.  You need a killer business plan, a big marketplace opportunity, and a solid track record in a related industry. It isn’t easy. That means to have the best chance of attracting capital investments, you need to target the right VC firms to approach. Once you’ve considered the following factors use a search tool like Findthebest.com or Entrepreneur.com/vc100# to narrow your startup capital search.

Geography – where does the VC fund tend to invest?

Investment range – how much capital are you looking to raise? Generally, VCs have an upper and lower investment size limit.

Investment stage – VC firms often solely invest in companies that are in a specific stage of development. Only seek funding from groups that focus on your stage of growth. For startups, look for VCs that offer financing for that beginning “seed” phase. Or, if you’re just past that, find VCs that make “early stage” investments for, say, marketing or product development.

Industry focus – find firms that specialize in your industry. Tech by far has the most coverage, but most industries have some VCs in their field.

The good news is when you’re financed by a known VC, your company earns some credibility. VC investments also can bring value to your startup because these lenders have knowledge of your industry including important contacts with potential customers, suppliers, and so on.

Having said that, a venture firm will generally want 40% or more ownership of your company.  When you’re growing fast, selling equity is very expensive because all of the gain on that share of the company goes to the VC investor.

Don’t raise more than you need.

But what if you do, later down the line, find yourself needing more than you originally asked for? It happens. You can go back to your VCs and ask for more. Though you’ll need to give them something extra, like a first right of refusal.

According to data compiled by Fundable.com, VCs write big checks, with an average investment size of $2.6 million for startups. Sounds good but the reality is VCs actually funded only half a percent of all startups looking for cash in 2013. So, they don’t invest in many new businesses, but when they do, they can invest big. Like I said, it isn’t easy.

Here’s a table with the ten most active seed-stage venture capital firms last year, according to Forbes.com. Many of these firms only do seed money, ranging from individual investments of $25,000 to $250,000. Probably worth noting is that, in many cases, these VCs teamed up with each other when investing seed money in startups.

10 Most Active Seed Money VC Firms for 2013

Venture Capital Firm Find Them
500 Startups 500.co   [sic]
Andreessen Horowitz a16z.com
SV Angel Svangel.com
Lerer Ventures lererventures.com
First Round Capital firstround.com
CrunchFund crunchbase.com/financial-organization/crunchfund
Innovation Works innovationworks.org
Atlas Venture atlasventure.com
Connecticut Innovations ctinnovations.com
Founder Collective foundercollective.com

Who funds more startups than VCs? Angel investors. These are private individuals, or small groups of friends or members of angel clubs, who have enough money that they can afford to make higher risk, hopefully higher return, private investments. Did you catch the “higher risk” part? Depending on your situation, that can translate to a better chance of getting funding from angels than VCs.

bigstock-Angel-Funding-Investment-Conce-1758040But angels will need to know you or the business.

Not all angels look alike. Sometimes the entry-level investors are simply high net worth people who just dabble in private investing. They’re probably not going to have the deep pockets of a super angel, but sometimes they’re willing to accept even higher risk investments.

To find the right investors for your angel financing, run through the same list of factors, mentioned above, used to select potentially amenable VCs.

Again, according to Fundable.com, in 2013 angel investors wrote about 16 times more checks than VCs, investing in over 61,900 companies. The average amount invested per startup was just under $75,000. There are currently about 268,160 active angel investors. Angels funded nearly twice the startups that VCs funded. But still, that’s less than 1% of all startups funded.

The top 5 angel investors of 2013 were busy making more than 165 combined investments. See the table below. The angel list was pulled together according to data compiled by the equity crowdfunding platform Fundable, and the entrepreneurship advocate Empact.

Top 5 Angel Investors of 2013

Who Investments in 2013 Investment Range Famous Investments
Aydin Senkut 12 $100,000-$950,000 Shopify
Weebly
David Lee 13 $100,000-$950,000 Twitter
Foursquare
Ron Conway 10 $50,000-$200,000 Google
Facebook
Zappos
Airbnb
Dropbox
Dave McClure 125 $25,000-$250,000 SendGrid
Bit.ly
Esther Dyson 5-10 $25,000-$250,000 Evernote
Flickr

Remember, even though these are the top venture capital and angel investors, carefully explore the startup capital options that might be right for you.

If you have an entrepreneur question, email me at RESblog@consumercp.com.