the importance of crowd Funding, venture capitalists and business angels for a firm
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With a variety of ways to fund your startup, all carrying their own pros and cons, knowing which one is right for your business can prove a challenge. Previously an arena dominated by Business Angels and VCs, startup funding has become more diverse and segmented in the past decade. Now it is easier for startups to raise capital from more than one source simultaneously than before.
Three sources most commonly considered are Equity Crowdfunding, Business Angels and VCs. But they are not exclusive of each other, particularly when you consider the Equity Crowdfunding option. This guide will help you weigh up the three options, and how they can work together. Let’s start off by defining each option:
Business Angels invest as an individual, or as part of a syndicate (a group of Angels), who invest capital into businesses, and occasionally provide experience and knowledge to help startups achieve success.
VCs invest in startup ventures 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.
Equity Crowdfunding enables a group of investors (the ‘crowd’) to invest capital through an online platform, in exchange for equity. As opposed to a single investor, or a small group of investors, this form of fundraising can involve hundreds or thousands in a single raise.
So, What are the Differences Between Angels, VCs and Equity Crowdfunding?
How Much do Angels Invest?
Angels typically invest between £10,000 and £50,000, with the average Business Angel investing a median of £25,000 according to the UKBAA. Angels invest personal finances into startups, whereas VCs invest through managed funds (this can be private or public money).
How Much do VCs Invest?
Since they are drawing from a large pool of resources, VCs invest larger sums than Angels, usually between £2,000,000-£50,000,000. However, if Angels invest as part of a syndicate, larger amounts of finance above £1.5m can be raised.
Additionally, there are also Micro VC funds, which are smaller forms of a traditional VC fund, and focus on seed and pre-seed stage startups, typically investing between £20k-£400k.
How Much Can You Raise Through Equity Crowdfunding?
The short answer is that in the UK, startups can raise up to the equivalent of €8m 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. It doesn’t need to mean turning away Angel and VC money. So, if that’s £10 from 50 of your friends and family, £10,000 in contributions from your consumers, or a £100k capital injection from a VC, the accrued value of these sources can result in a substantial investment into your startup, which in total, can even exceed the €8m as part of a wider round.
For example, in 2018, TransferGo raised €11.3m on Seedrs, through a combination of VC investors and over 1,000 crowd investors, showing how you can combine multiple investment sources – more on this later.
Who They Invest In
angel vcs crowdfunding sitting down
Business Angels will generally invest in earlier stage businesses, whereas VCs look to invest in startups with proven business models that are looking to scale (albeit this can vary depending on the focus of the VC firm). With a high cost of administration and a necessity to be highly selective to ensure a return on the fund (up to 40x), VCs are more risk-averse than Angels, so make fewer small investments in startup and seed-stage companies.
Conversely, Equity Crowdfunding is suitable for startups of all stages. Raises on Seedrs start at a £50k minimum raise and extend up to multi-million-pound raises, enabling you to raise investment; whether you’re looking for seed capital or Series A onwards. In 2018, there were successful fundraises across 17 different sectors, and 12 different countries, due to the diverse nature of the investor community.
Investor Involvement
While Angels may provide advice by taking a role on the board and introducing you to important contacts, their primary responsibility is to supply you with financial support. So, their degree of involvement depends on their own disposition, as a passive or active Angel.
Active Angels will typically play a significant advisory role and will be actively involved with the startup post-investment. However, passive Angels, usually as part of a group of investors, are not expected to have any direct active involvement in the business they are funding in.
By contrast, VCs will always tend to demand a high level of involvement in your startup, often requiring a seat on the board, to have more control over the high return they’re seeking. While this can be a tremendous benefit to your startup, their control and oversight on your management can be a strain.
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