Contrary to what you are seeing in the press there is simply too much money in the World at the moment; too much capital seeking too few investment opportunities. Remember the 1930s depression created more Millionaires than in any other era (ever), and now will be no different. A large amount of High net worth individuals in the Western World are seeking to diversify their portfolios away from traditional investments as a defensive hedge against stock market volatility and history low interest rates. Remember, historically, in times of recession the two best investment classes that have outperformed traditional markets have been commodities and private equity. So if there is so much capital available in the World today, why is it so difficult to locate the capital you need?
The most probable answer to your question is that the amounts of capital you are seeking to raise for your start-up are way too small to catch the eye of Venture Capitalists. After all it is relative. If a Venture Capitalist has tens of millions of dollars to invest into private equity why on earth would they invest into 100 or 200 start-up companies? Who could possibly manage and foresee all of these investments? Managing one entrepreneur can be hard enough, but 200 start-ups?
So relatively speaking, investing in you would prove cost-prohibitive, even though arguably they would receive more value overall.
The Hunt – Venture Capitalists vs. Angel Investors
Venture Capital firms are one way to raise a serious amount of capital but as you may imagine there are pitfalls. The main one being loss of equity far beyond the 51% mark. Further the final vote on ‘the right of sale’ will also most probably be a mandatory right for them. Since Venture Capitalists main motivation is ‘ROISAP’ (return on investment soon as possible) Venture Capitalists will always have an almost manic desire to flip every deal they do as quickly as possible. And they will not care where that return comes from as long as they are able to receive a massive bonus for the risk and skill that they have invested.
More appealing to an entrepreneur starting-up is to seek out a business angel investor that is interested in the line of work you are involved in, as they will either take an equity position and some level of debt (or typically a combination of the two) in exchange for their investment. They will also take a seat on your board of directors, which they will use as a platform to monitor their investment and to provide invaluable advice and mentoring. Sometimes they can actually take an active role in the organization and get it kick started into high gear which is where the real value of their investment can come into play. Raising investment from an experienced angel investor will quickly allow a business to hire key employees and give the business the time needed to develop and commercialise its business model to the point where it is ready to seek larger scale, second-round financing at a much more reasonable cost-to-equity, due to the proven track record and new value within the organization.
Other benefits to the entrepreneur include access to the expertise and business networks that the angel investors may be already involved with. In addition to this, the growing trend of angel investor syndicating; where a group of angel investors band together to fund larger investment deals now means that an entrepreneur can raise significant capital (significantly above the $500K mark) in a single financing deal without the need to negotiate separately with each investor.
Seeking to raise capital investment from Venture capitalists may seem like a romantic notion from a distance but if you are an entrepreneur with a real passion for your product and are seeking to drive your company forward in new pioneering ways then Venture Capital may not be for for you unless you have already been successful with your product or service in the marketplace. Think, Dyson vacuum cleaners before they had turned a real profit – would the product have been developed with the same love and attention to detail if they had chosen Venture Capital from day 1? Chances are the creative processes in the product creation stages would have been distorted by phones ringing endlessly for profits and results.
If you are seeking to build a business and your main goal is a future exit strategy like an IPO or trade buy-out then seeking out Venture Capitalists can be an extremely effective strategy. Not only will they be able to structure your business for ‘big business’ from the beginning but they will also ensure that the business is built from ground up with the exit in mind by providing a highly effective network of professionals to move the business forward, packaged up from day 1 for the exit. Just do bear in mind, that many entrepreneurs in from the start have been squeezed out long before the ‘D-day’.
Angel investment therefore represents an invaluable source of alternative funding. And one that is far more attractive and realistic for a start-up entrepreneur that is looking to build a business and stick with it for the longer term. Benefits for both the Entrepreneur and the Angel investor can be great provided of course that the expectations are well drafted and thought out from day one and the funding agreement is structured to meet the demands of both sides.
The main difference between a business angel and a venture capitalist is that venture capital funding will come with legal agreements that will inevitably always be Venture capitalist biased with terms that almost seem utterly unfair and unjust, whereas, Angel investment will be far more flexible and tailored to both sides. It’s not uncommon for some Angels to even shy away from using corporate solicitors when drafting agreements for funding. The reason quite simply being is that if a high net worth individual chose to invest in 8 – 10 companies, the total legal bill could turn out to be over $50,000.00 (assuming a lean estimation of $5K per company which is low!)
Raising venture capital funding will not only provide you with the necessary structured investment you are seeking for your start-up but will also bring you a serious wealth of managerial talent and experience but perhaps not mentorship that most entrepreneurs will crave during the early stages of their business start-up. However, Venture Capitalists will always provide structured advice and direction on the optimum way to build the company and this will avoid major pitfalls that running a big business will bring. In fact this professional advice may well bring the competitive edge to most businesses and a Venture Capitalists network of contacts could end up making all the difference in a successful exit via an IPO or Trade Sale. But always remember that being funded by a Venture Capitalist will mean that they have invested millions into the business and regardless of whether or not they actually hold a controlling interest in your company, they will be in control of your organization and will have a lot of power over how the company runs and how they will get their money out and you will be forced to go down directions that may not be in tandem with your ideals, goals and dreams for your enterprise as their motivations may be different from yours.
….So better with an Angel Investor? Or Venture Capital?
Choosing Venture Capital or Angel Investment relies on your personal aspirations as an entrepreneur and the direction you wish to take your company. If you are dead set on controlling your own destiny and will not easily bow down on the direction that your business should go or the way that your business is to be run (and do not have many successes under your belt currently), then it would be better for an entrepreneur to start-up on their own or with the help of an Angel Investor (or Angel syndicate if the investment requirement is too large to be funded by one individual). After running, evolving and commercialising the business, the next best course of action may be to turn to Venture Capitalists when you believe you are ready to take your company to the next level and will need a serious amount of capital to do so. To maximise your chances of raising investment capital from a Venture Capitalist it is important to be able to demonstrate that you have a degree of success in your past, which is where the first round of your funding and management of your cash flow will come in handy.
If you do decide to approach venture capitalists and should they agree to do a deal with you, then it will be crucial on your part to invest in the best legal advice that you can afford for the ensuing negotiations and deal structure that they will propose as this will greatly determine your personal future success (or failure). I have heard repeating stories from both angels and entrepreneurs’ of multi-million pound exit deals for everyone apart the Founder as their shares were locked-in contractually or some other oversight that was in place at the beginning of the deal. Always bear in mind that Venture Capitalists are almost lawyer grade consummate professionals and you will have to become one before playing in their league.
By Rishi Anand
Rishi Anand is a successful UK based entrepreneur and is the Founder of Venture Giant. He is currently the driving force behind the commercialization and globalization of www.venturegiant.com with plans to launch the service in India and Australia.
Venture Giant is the premier UK business Angel Investment network & small business funding portal that matches serious and active business Angel Investors with Entrepreneurs