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If you’re new to raising capital it can be difficult to anticipate the nuances between the different kinds of investors you’ll encounter while fundraising. Today we’ll be exploring 3 types of potential investors: angel investors, venture capital firms (VCs), and non-accredited investors, as well as what they can do for you and your company.
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Angel investors are high net worth individuals who tend to invest in pre-revenue, early-stage companies seeking initial capital to start their business. These investors normally invest alone and only for themselves, although some angel investors band together and form an angel network. Angel investors can be relatively hands on, which may be helpful if you’re also looking for a thought partner.
Angel investors aren’t typically interested in delving deep into your numbers, since as an early-stage company you likely won’t have many numbers to share. Angel investors care about market size, potential to transform an industry, and innovative technologies. When pitching to a potential angel, you should also be sure to explain how your team’s professional background and expertise will benefit your company.
A venture capital fund is essentially a managed pool of money set up by what are called Limited Partners, which include entities like school endowments and pension funds. These funds are then managed by General Partners, who decide how to invest the money on behalf of the Limited Partners. Some VCs also have mandates, meaning that they may have certain parameters for their investments. VCs tend to care more about revenue, margins, and market share potential than an angel investor would, but here too a well-oiled and driven team is crucial. When presenting to a VC be prepared for more intensive due diligence than an angel investor might do.
Although there are some VCs that focus exclusively on early-stage startups, most VCs like to come in during later fundraising rounds and provide large amounts of capital to businesses ripe for scaling. However, VCs are notoriously selective, so be sure to have realistic expectations, as only 0.05% of small businesses raise startup venture capital. Many VCs also expect that they will be a member of your company’s board of directors, and it’s best to be aware of that stipulation as you raise funds.
VCs, angel investors, and other accredited investors play an important part in the capital raising process. However, with the 2016 creation of “equity crowdfunding”, there’s an addition to the old model. You can now raise money online for your private company through a Regulation Crowdfunding (Reg CF) offering, meaning that anyone can be a potential investor.
A Reg CF offering enables you to list your private company on an online platform for private market opportunities. When you raise funds this way, smaller investors can purchase equity in your business, with a minimum investment amount of your choice. You can also market your private offering, a unique aspect to Reg CF offerings. Additionally, because the bar to invest is lower, you can tap into your existing networks of family, friends, customers, and social media followers to support your business.
Non-accredited investors are typically drawn in by you, your company’s story, and your online offering page.
Both VCs and angel investors are accredited investors, meaning that they have no limits on the amount of money they can invest. However, a Reg CF offering allows you to market your offering to all investors, including non-accredited investors. The good news is that you don’t necessarily have to choose. When you list your company as using an online investment platform such as Netcapital, one of ValueSetters’ partners, you’re able to do a side-by-side offering, where you can raise from both non-accredited investors and accredited investors at the same time.
Whatever funding routes you pursue, be sure to be prepared, do your research beforehand, and openly express your passion for your business - all investors, accredited or not, will appreciate it.
Paige is the Content Marketing Associate at Netcapital Advisors. She is a graduate of Wellesley College, with a double major in American Studies and East Asian Languages and Cultures. Outside of her work at ValueSetters, Paige pursues creative writing and keeps up with the latest cultural news.