What's the Difference Between Angels and Venture Capital?

Critically-acclaimed bestselling business author

by Kim Lavine

There is a big difference between VC and Angels. Do your homework and get it right if you want money--starting with these basics...

What is a Second-Stage or Mid-Tier Company?

In general, a company is second-stage if it is:

• privately held
• past the start-up stage
• facing issues of growth rather than survival
• employing six to ninety-nine full-time employees
• generating between $750,000 and $50 million in annual revenue or has that amount of working capital in place from investors or grants

What is Mezzanine financing?

• Mezzanine financing is not a loan but second-stage investment by individuals, usually secured by equity-based options like warrants, which can be converted to stock.
• Mezzanine financing is a debt only in the event of a company?s bankruptcy, when the investors take priority over original owners in the repayment of debt.
• Typically a business only pays annual interest on money loaned to it through mezzanine financing until warrants are converted into stock.
• In bigger deals, mezzanine financing can be any late-stage investment by VC or Angels somewhere between start up and going public. ? Banks do not provide Mezzanine Financing.

What are Angel Investors?

• Angel Investors have to be certified by the SEC to be "high net worth individuals" with minimum liquid assets (cash) of $2,000,000 and minimum average salaries of $250,000 a year.
• They are private investors who specialize in high-growth fields and involve themselves directly in management of the endeavors they fund, usually forming "strategic alliances," where they merge their resources/experience/companies with that of a fledgling company on the cusp of exponential growth, while reaping financial returns much higher than any other traditional investment vehicle typically available.
• Angels fund thirty to forty times as many companies as venture capitalists every year.

What is Venture Capital?

• Private equity?money?that comes from investors willing to risk capital on more speculative ventures.
• Usually reserved for second-stage companies in a high growth mode, or start-ups with an exceptionally strong business plan.
• A typical venture capital investment usually requires sale of 25 percent to 55 percent of the company to investors.
• Some VC firms have the money, and some are brokers who raise it.

What?s the Difference Between Angels and Venture Capital?

• Angels typically have a more patient exit strategy with a mandate to invest in businesses in their communities to foster economic growth and development.
• Venture Capitalists are concerned with only one thing: the bottom line.
• Sometimes Angels and VC are one in the same, moving from their own personal VC firm to their Angel group in one afternoon.

Do your homework

Research the people you are working with as well as you can. The best way to get information on these people is to talk to your SBDC counselor, who is usually connected to many business leaders in the community.

• Some VC firms don?t actually have money, but are more like brokers who have the connections and know how to get it.
• Don?t expect to get names, business cards or contact info on individual Angels as you would VC firms.

Use every opportunity you have to get face-to-face with Angels to your fullest advantage.

continued tomorrow...

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