Investing in Startups
A startup is usually defined as a newly launched private company (< 5 to 10 years old) that’s designed to grow rapidly. Most startups launch as very small operations while they develop their inceptive idea, and then seek additional funding from venture capitalists and angel investors as they build out their businesses.
Startup investors are essentially buying a piece of the company with their investment. They are injecting capital in exchange for equity; a portion of ownership in the startup and rights to its potential future profits. Startup investors can be categorized into two main pools: Angel Investors & Venture Capitalists.
Angel Investors are typically high-net-worth individuals who invest their own money very early into the formation of a new startup.
Angel Investor Pros:
Willing to take a bigger risk than traditional financing institutes.
Angel investments typically don’t have to be paid back if the startup fails.
Bring a lot of knowledge to a startup that can boost the speed of growth.
Angel Investor Cons:
Founders give up some control of their company when they take on this type of private investment.
Venture Capitalists (VCs) are employees of venture capital firms that invest other people’s money into companies. VCs are interested in big returns and usually get involved with startups that have proven profit records.
Venture Capitalists Pros:
Investments are fairly large
Unlike a loan, there’s no obligation to pay it back if the startup fails.
VCs are well-connected with other businesses that could help you and your startups
Venture Capitalists Cons:
VC firms are expecting a high return on their investment.
Part of what VCs want in return for their investment is equity in a startup; you’ll have to give up part of your ownership.
VCs may even end up with a majority share (more than 50% ownership) of a startup.
So which one of those are you looking for?
