Angel and venture capital investors can be promising options for high-growth small businesses
Many small business owners say accessing funding is one of their biggest challenges, according to our research. Whether you’re running a brand-new startup looking for its first bank loan or an established company seeking high-impact investment dollars, access to capital can be a stumbling block.
For fast-growing companies, angel or venture capital (VC) investors may be promising options. But these hard-charging investors aren’t the right fit for every company. Here’s what you need to know about them and how to prepare if you think your business might be a good candidate.
How VC and angel investing work
Angel investors typically provide financial backing for startups with interesting ideas while VC investors seek out businesses with growth potential. They differ mainly in whose money they are using: Angel investors are usually high-net-worth individuals who are investing their own money, while venture capitalists (VCs) are typically professionals who work for a fund that pools other investors’ money.
Angels and VCs take some percentage of the business’s equity in exchange for a certain amount of funding, which means that these investors own a portion of the company. They expect a large return on their investments.
As a result, this funding typically comes with high investor expectations and involvement. Investors usually lay out specific growth benchmarks and usually expect to see a return within three to five years. In addition, many VC and angel investors expect to be involved in decision-making.
Is angel or VC funding right for you?
The most important factors in deciding whether you should pursue this kind of funding is how fast your company is able to grow and how much room it has to scale. VC and angel investors are looking for high-growth companies, so if your trajectory is slower or smaller, look elsewhere for funding.
And remember: Just because your company can scale fast doesn’t mean doing so is right for you. With angel or VC funding, your company must be ready to put a large amount of money to good use quickly. Also remember that the process of seeking it out is time-consuming, typically taking founders weeks or months of full-time work.
It’s worth noting that women and people of color are underrepresented among both funders and funded startups, though the industry is seeking to change that. In 2020, only $1 billion of the almost $150 billion in venture capital raised by U.S. companies went to startups founded by Black entrepreneurs of any gender.1 Various angels and VC firms are actively working to diversify funded companies. In another example, a new St. Louis – based $25 million VC fund will prioritize funding startups founded by people of color.2
How to pursue angel or VC funding
Don’t just introduce lenders to your business: Let them get to know you, too. Use a résumé to show, through concrete examples, that you have the experience to run a thriving business and manage the loan well. While these details may not directly affect a lender’s decision on your loan, they can help you build relationships with your banker.
- Seek out potential funders. Find promising connections via LinkedIn, introductions from colleagues, industry events, and social media, especially Twitter. Register with Crunchbase, a popular source of leads for angels and VCs. Connect with VCs interested in diverse founders via industry networking groups and diversity initiatives.
- Update your business plan. This document should state your company’s goals and describe its operations. Include an overview of your industry and your company’s place in it and describe your marketing objectives. Include up-to-date financial projections to show the potential for growth.
- Write your elevator pitch. Include a short, powerful description of your business to catch investors’ interest. Use as few words as you can to get across the power of your idea. And avoid too much background or context; instead, quickly explain the problem you’re solving and then dive right into how you’re approaching it in a novel way.
- Create a pitch deck. This should be succinct; industry insiders suggest you stick to 10 slides total.3 Include information on the strength of your team and financials that illustrate the potential for scale. Explain specifically how you will use the investment money to grow.
If you execute all the previous steps well, you may soon receive an invitation to meet and/or pitch to an investor. Think ahead about what questions to ask, such as the amount of funding on offer, the equity the funder is seeking, and the length of time they anticipate investing.
Other questions to consider are:4
- What percentage of the fund does this investment account for? (The higher the better, as the investor will have more incentive to help you succeed.)
- How often does the fund follow on with more funding in the next rounds?
- What are the fund’s reporting requirements?
- What will the due diligence process be like?
- How much interaction will the business have with the funder’s team?
Do you have big ambitions?
For small business owners with big ambitions, angel and VC funding can be powerful options to help your business grow and thrive. Just be aware that these investors are looking for businesses with the potential to scale, and that receiving funding from them comes with some serious strings attached.
If you believe your company is a good fit for this kind of funding, network assertively, create a succinct pitch, and ask probing questions before moving forward.