What’s The Difference Between Angel Investors And Venture Capitalists?
Which investment option is best for you
Starting a business is an exciting time to make your passion a reality. The process of raising and finding money to get that passion off the ground can be a challenging step. One of the ways to achieving that is through investors whether it be angel investors or venture capitalists.
Some people may be familiar with the show Dragons Den UK or the Australian version Shark Tank. In these shows, a hopeful startup comes before a panel of investors. They give a short presentation and answer a variety of questions from the panel. These range from financial like profitability and expected market share to questions of long-term goals. Eventually, if the investors believe the idea is good they will invest. This comes with a catch, they expect a share in the business, a cut of the profit.
Venture capital is focused on an emerging business a startup. Private equity is usually reserved for already established businesses. Venture capitalists are usually after a large ownership in the business. Instead of just changing the structure of the business to a partnership, venture capital normally utilises a limited partnership. This has tax benefits and limits the liability of investors making them more likely to invest. As a result, there is a list of requirements to be met in order to be an eligible investment. The critical requirement is to be either a company or a unit trust.
Sourcing venture capital
To begin with, there are government assisted programs in place to help you source venture capital. They are registered as part of the venture capital limited partnerships or the early stage venture capital limited partnerships. Furthermore, the government also has the entrepreneurs program. The program provides grants, funding and assistance. The emphasis is on new and innovative services and products. Some businesses may apply for the biomedical translation fund. It is a niche venture capital program which exists to support biomedical discoveries,
An angel investor is going to be the step before a venture capitalist. Angel investors are putting in fewer funds than a venture capital firm and should, therefore be easier to obtain. When you use an angel investor it can be more personal than just obtaining money from a large investment board. The angel investor can provide business advice, sit on the board as an office holder and also provide financial support. This comes with the cost of giving up some of your ownership over the business, as this is a form of equity.
Angel investor or Venture Capital
It all depends on how big your business is and how far it has progressed. A small startup may be risky and struggle to find funding from a large investment firm. However, a close friend, relative or stranger may be willing to provide some money in exchange for some financial share return later on. Where you want your business to move is also key. A large investment from a venture capital firm is going to reduce your say in the future of your business. Generally, investment firms want to oversee and control their investments and this is something to factor in. Finally, a venture capitalist will be difficult to secure without the right planning and nailing that elevator pitch.
Need further advice? Contact a LawPath Consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.
Justin is a legal intern at Lawpath as part of the content team. He is currently studying a Bachelor of Laws and a Bachelor of Economics at UTS.