First, let’s clear up the differences between angels and venture capitalists (VCs). The two main distinctions are:
- Angels invest their own money; VCs invest other people’s money.
- Angel investment is more likely to be in the hundreds of thousands, while VC investments are generally in the millions.
Venture Capital is Hot on New Investments
According to the National Venture Capital Association, venture capital does roughly 4,000 deals per year, and the average is about $20-$30 million per deal. In Q1 2014, 92% of venture capital went to new funds.
Are VCs Right for Your Business?
VCs focus on high returns for high risk. Just like most angel investors, they’re not looking just for a healthy company, or dividends; they’re buying ownership of companies with the intention of selling that ownership for 10, 20, or 50 times what they invested. They make their money when they sell their share of ownership, which is called their “exit.”
VCs invest in companies that:
- Show promise for massive growth.
- Have to have very strong management teams.
- Are able to scale quickly.
- Have something unique, like a “secret sauce,” proprietary method or technology, that will protect them from getting beaten by competitors.
High Investment Comes With High Stakes
VC money comes from organizations like insurance companies and university endowment funds, enterprises, and high-net-worth individuals. With an average of $20 million per deal, VCs have to invest in promising startups and emerging businesses in order to see returns on their investment.
With the stakes being so high, VCs often require lots of paperwork, such as annual minutes and certificates of incorporation, a formal plan and structured presentation, and projected or actual profit-loss statements. Many VC groups recommend using law firms and accounting firms to help prepare the application and perform due diligence.
VCs often refer to the first round of funding as the “seed round,” which is the first few hundred thousand dollars, followed by “series A” for a few million after the seed funding, followed by series B, and series C, each round being a bigger investment.
How to Find Investors
Start-ups are often introduced to the right VC groups by their lawyer, accountant, or financial advisor. Besides having the relationships with VCs, those are the people that know VCs preferred industries, desired location, typical level of investment, and level of involvement.