Angel Investors vs Venture Capital: What Does Your Startup Need?

So, you’re a startup founder who has poured your ideas into your product. Now,  you need to secure funds to launch appropriately. Angel investors vs venture capital: which is better for your business?

The ideal funding source for your startup will depend on its specific needs and growth stage. If it is in the early stage and needs seed funding, it might be better to go with angel investors. Going for VC usually means your company is ready to scale. Still, your startup might benefit from both.

In this article, we’ll walk you through startup funding and give you a guide to help you choose the perfect avenue for your startup. Before that, we’ll show you the difference between angel investors and venture capitalists.

Who are angel investors?

Angel Investors — sometimes called business angels — are high-net-worth individuals (HNIs) interested in investing in promising startups. They offer to invest in startups when they are in their early stages or need seed funding. 

Early-stage startups have already founded a basic idea and may have gathered some traction but need funding to scale their operations to reach more customers. Seed funding is the initial capital injected into a startup to get it off the ground.

It is mainly used to develop a prototype for the startup, conduct market research, and launch a Minimal Viable Product (MVP).

However, angel investors are more drawn to the fact that they get high returns should the startup succeed. The investment range for early-stage startups usually falls between tens of thousands and a few million dollars — which is perfect for kickstarting a startup.

What makes them angel investors?

Angel Investors are usually either successful entrepreneurs or high-net-worth individuals. Having built and possibly exited their companies, they have a lot of experience and knowledge to understand the challenges startups face and their opportunities at the early stage.

Their target market is the startups with high-growth potential who need direction. Their investments are typically a bit flexible, giving way to connecting on a personal level with the startups they are investing in.

What are the benefits of being funded by angel investors?

Securing funds from Angel Investors comes with several benefits.

Some of these benefits of getting angel investment include:

• Zero Interest: Angel Investors tend to negotiate by staking a percentage ownership in the startup. This could be as low as 10%.
• Passion alignment: Since Angel Investors have a shared vision and passion for your startup as you do, it can promote a strong working relationship and genuine interest in the startup’s success. An Angel Investor who shares your passion is bound to be a more collaborative partner.
• Guidance and mentorship: One of the most valuable assets of partnering with an Angel Investor is their experience. They can offer invaluable guidance, mentorship, and advice on marketing, product development, and team building.
• Flexible terms of investment: Angel investors are more flexible with their investment approach and are more willing to negotiate more favourable terms to the startup, like less dilution of equity. This flexibility gives room for startup founders to have more control over their companies.

What are the downsides of being funded by Angel Investors?

If there are benefits to securing funds from Angel Investors, there are possible downsides, too.

Some of the potential downsides of angel investment are:

• Unstructured investment process: The investment process for Angel Investors is not as structured as the rigorous process of venture capital. This could lead to a lack of legal safeguards and due diligence. 
• Limited funding: Although seed funding is an essential part of kickstarting a startup, the individual investment capacity of an Angel Investor is typically limited. This could pose a problem for startups that require considerable sums to scale up and keep things moving.

Still, these downsides do not exist for all angel investors. For example, some angels have structured investment processes similar to that of VCs but with simpler terms. 

Who are Venture Capitalists?

Venture Capitalists are professional investment firms that manage a large pool of capital obtained from various sources to invest in promising companies. They get money from sources such as insurance companies, pension funds, and even high-net-worth individuals. 

A VC team generally includes:

1. General Partners (GPs): They are behind the significant investment decision-making. With their experience in various specific market trends and industries, they can easily spot promising startups in need of investment.
2. Investment Professionals: They support the GPs. They are associates and analysts who perform due diligence on the potential investment of promising startups. They evaluate the startup’s business model, team capabilities, and market opportunity.
3. Portfolio Managers: These guys handle the ongoing guidance and financial support once a startup is funded. They help the startup go through the growth challenges and help them achieve their goals in total.

VCs are not always interested in growing a startup from the ground up. Instead, they target later-stage companies with high growth potential. Still, investment from VCs can range from several hundred thousand to tens of millions of dollars — enough for most startups to scale their operations quickly.

For example, we at the VC firm Ingressive Capital invest up to $500,000 for up to 10% ownership of tech and tech-enabled startups in Africa. However, we focus on early-stage businesses — particularly startups in the pre-seed and seed stages. 

What are the benefits of securing funding from VCs?

VCs are a significant financial muscle when it comes to investment, and so they have a unique blend of benefits to boost a startup’s growth.

Here are some of the benefits of securing VC funding: 

• Significant investments: VCs give large sums of capital to promising startups they invest in. This means a lot of funding dollars. With this amount of funding, you can invest in marketing campaigns, equipment and infrastructure, and talent acquisition to boost the experience on your team. 
• Vast network and connections: Since they hold large sums, they automatically are gateways to valuable industry resources and connections. Having access to these connections and networks, you can waltz your startup through invaluable mentorship opportunities and partnerships that can project your startup beyond the financial backing the VCs already gave.
• Post-investment support: VCs are known to have a firm hold on relationships even after investment. They provide support from strategic advice to connecting you to industry experts and potential customers, all the while scaling your business. 

But are there downsides?

What are the challenges in securing funding from VCs?

As much as there are invaluable benefits to securing funding from VCs, there are equal downsides to it. 

Here are some of the possible challenges in securing funding from VCs:

• Demanding structures and terms: The adequate financial backing from VCs comes with the baggage of demands. They expect a significant return on their investment, so the pressure to deliver results with high performance is more from their side.
• Competitive process: VCs receive numerous pitches from growing companies, and do, the selection criteria are pretty rigid. You may need to demonstrate a more robust business model, a capable founding team, and a compelling market opportunity to impress them. Bagging a VC is no walk in the park.
• Dilution of founder’s equity: Since more considerable sums equal significant ownership stakes with VCs, they may require more shares of your startup and potentially limit you from having control over certain decisions.

Now, which is best?

Angel Investors vs Venture Capital: How to know which one your startup needs

You need to consider certain factors when making a funding decision. This way, you can be sure you do what’s right for your startup’s future.

Here’s how to know whether you startup needs angel investment or VC funding:

1. Startup growth stage. What growth stage is your startup? This is the basic knowledge you need to have. Pre-launch and early-stage startups who usually seek seed funding will find a better alignment with Angel Investors. While mid to large-stage startups who have started getting traction and have a set of financial records but need a considerable amount to scale up will find a better fit in Venture Capitalists. 
2. Funding needs. How much capital does your startup need to take it to the next growth stage? If you need funding to launch or to boost your early stage just a little, angel investment is the right call. However, if you need enough funding that could fuel your startup to rapid growth, going for the VC option is the best.
3. Growth aim. How fast do you want your startup’s growth to go? If you wish to steady-paced growth for your startup, angel investment is the right fit. However, if you want an explosive growth process for your startup, the venture capitalists investment is the right fit.
4. How much control you can relenquish. Do you want sole control of your startup, or are you willing to relinquish just a little between 10% – 30% of your startup? Angel Investors are typically more flexible in their investment terms and structures than VCs, which can involve stricter controls.
5. Team’s experience: Does your team have the expertise to lift your startup from the ground, or do you still need guidance to walk you through how to launch a promising startup? If you’re completely new to the game, an angel investor might have more value for you, your team, and the startup.

Remember: funding isn’t just about raising money. It’s about choosing business partners. An investor isn’t a random money cow, they’re a long-term partner that can and will impact you and your startup.

Our advice? Prioritise personality fit. Ensure your investor — VC or angel — is someone you are willing to work with for as long as your business exists. 

Final thoughts

The decision between the Angel Investors and VCs depends on the specific needs of your startup. You can choose to go with one or both options of funding sources.

Still, the decision might be somewhat difficult — especially if you’re at the early stages. If that’s the case, we recommend you apply to our VC fund if you want the best of both worlds and join the ranks of businesses shaping Africa one product at a time.