What is a Startup?
A startup is not necessarily a young company, but rather a new company that relies on or develops with technology to grow its business and to achieve its goal. With a scalable business model intact, startups normally seek investments in order to move forward and expand over time.
What is an Angel Investor?
An angel investor is more often than not a High-Net-Worth Individual (HNWI). A HWNI, is an individual who owns or has more than $1million in liquid financial assets. These investors invest within the early phase of a startup in exchange for equity in the company. They will normally invest money once, and later provide aid for the launch of the startup. Unlike venture capitalists (VCs), angel investors use their own money to invest in a startup.
Why are Angel Investors popular?
Angel investors are extremely popular with startups, as they provide a brilliant combination of funds and expertise. For a startup in the early phase or seed stage of their company, they will need a large amount of attention and support to grow their company. Therefore, a startup will more often than not want an angel investor to invest as they provide not only money but advice, networking and support to increase a startup’s chance of a successful exit.
These are 3 of the main reasons why startups prefer Angel Investors:
1. They offer wealth and knowledge. Of course angel investors offer a vast amount of cash and funding for startups, but what else do they provide? The best angel investors are the ones with a wide range of first-hand experience of running a successful business. Research shows that startups funded by angel investors are 14% more likely to survive for at least 18 months.
2. They help with networking. Angel investors themselves are already a part of the large entrepreneurial network. This means, they are able to introduce their startups and the entrepreneurs they mentor into these circles, which allows them to further grow. Startups need access to a wide range of experienced professionals and making these connections can also help them with further funding.
3. They are willing to gamble. As angel investors get their money back depending on the successfulness of the startup, they have to predict how big the startup's value will be. Normally, an angel investor expects to get their money back within 5-7 years with an annual IRR (internal rate of return) of 20-40%. As of 2022, around 90% of new startups fail. Angel investors take a huge risk investing in a startup, as they can lose a considerable amount of their investment.
Venture Capital Funding
What is Venture Capitalist Funding?
Venture capital funding is a form of private equity. The main difference between a venture capital investor (VC) and a private equity investor is that VCs normally fund young businesses or companies in their seed stage, whereas private equity investors normally fund older businesses that are struggling. Venture capital funding comes from money pooled together by wealthy investors or investment banks. Investors use this form of funding to provide finances to startups and small businesses that are predicted to have long-term growth. However, venture capital funding is normally issued to small businesses with a long-term growth potential or businesses that have grown quickly and want to continue to expand. Not only do VCs provide funding, but they can also provide technical or managerial expertise.
What are the 3 main differences between venture capital funding and angel investors?
1.The first main difference is that angel investors are individuals, whereas venture capitalists are part of a company. An angel investor is a wealthy individual who chooses to invest in potential companies, however venture capitalists are funded from groups of different people. Their money comes from pensions funds, corporations, foundations etc.
2. Angel investors invest a lot less money than venture capitalists. Because angel investors are individuals, they usually have less money to offer, whereas venture capitalists can invest more money as they are a result of money that has been pooled together. Angel investors typically invest around $25,000 to $100,000, but it can be much higher. Venture capitalists invest a lot higher, from $500,000 to $4million.
3. An angel investor is mainly there to offer and give financial support, and therefore they are not obligated to give advice, or introduce you to prospective networks. However, if asked, they can provide those services, as it depends on what the startup company wants and what the investor is willing to give. On the other hand, a venture capitalist's role is to help build the company's success, so they need to be very involved with the company's decision-making. However, this can be seen as a disadvantage, as they have a lot of power over the company, and can influence things like management teams and even act as a member of the board.
The startup world has created a new groundwork of entrepreneurship
The tiers of Venture Capital Funding
Unlike angel investors, a venture capitalist prefers to invest in a business when the viability of the product has been tested and the business shows potential. These are the 3 tiers of venture capital funding:
- Pre-seed stage. This is where the startup is crossing over from the idea stage and into developing the product. At this stage, funding can really help a company to start setting up its business. At the pre-seed stage, founders of the company are usually looking for investments from angel investors, or from sources they can rely on, like family and friends. A venture capitalist will rarely show interest in a company at the pre-seed stage unless the idea is captivating and in a good market, therefore they will be able see the profit opportunities of this company.
- Seed stage. This is the stage where the company is planning to test market their product or service, and so they haven’t started the big scale operations yet. Venture capitalist firms will normally select the seed stage to invest in the company.
- Series A. This is the first round stage. This is the stage in which the company already has a go-to-market strategy set up. They will have a product team and are ready to step up to sales and manufacturing. The funding for this stage is from $2 million to $15 million, but more often than not, the investment is around $5 million. As this is a considerable amount of funding, there must be a definite business model in place to show the company's potential.
What is a startup accelerator, and why is it different from a startup incubator?
A startup accelerator is a program that is aimed at seed stage and early-stage startups that already have an MPV, minimum viable product. For around 4 months, accelerators help startups through every step of the company's entrepreneurial journey. They provide mentorship, resources, networking and sometimes funding to aid startups in their growth. These startup accelerator programs are very prestigious and selective, with an acceptance rate of 1-2%, which is lower than Harvard's acceptance rate of 5%.
- One of the main differences between startup accelerators and startup incubators is that accelerators are a lot more hands-on. They are heavily invested in the company, and offer a large amount of aid in education, mentorship etc. to speed up the growth process. Startup incubators, on the other hand, are much more laid back. They provide legal and business resources, but they are less involved in the process, and will provide support whenever they are needed. They also rarely provide capital, therefore they don’t typically ask for equity from the business.
- Startup accelerator programs have a set time of 3-6 months. This is because their main purpose is to speed up the growth of a startup. Instead of taking 2 years for the company to be where they want to be, the startup accelerator will manage to accomplish this in only a few months. This is one of the reasons why they are heavily involved in the company. Incubators are more open-ended, and will usually be involved from around 1 year to 5, which is why they are not a very intense program like startup accelerators.
- Startup accelerators are generally not market specific and will normally invest in any startup they see potential in, no matter what market it is in. Incubators are a lot more specific and will invest in a company depending on which market they are in. For example, New York based Chobani Incubator is a startup incubator that's solely focused on the food market. Startup incubators sometimes provide a co-working space, but if the company is not based in the same geographic location, the startup will have to relocate.
The 5 best Accelerator programs in America
Y Combinator was founded in 2005 in Cambridge, Massachusetts and is one of the most famous accelerator programs in the US and around the world. This startup accelerator mainly focuses on seed stage startups. From originally launching 40 investments a year, to helping launch 3,000 companies a year, Y Combinator is one of the most successful startup programs worldwide. It has a large portfolio of previous investments, Airbnb, DoorDash, Stripe, Reddit etc. From January 2022, Y Combinator has been investing $500,000 in each startup, whereas previously, companies were given around $120,000.
Techstars is a startup accelerator that helps startups with more than just capital. If a startup becomes a member of the program, they can expect mentorship, capital, networking etc. This is a 90 day program, where startups and teams of entrepreneurs can be assisted during their entrepreneurial journey. Their program is designed for mainly first-time entrepreneurs.
Mass Challenge is a 4 month long, non-profit, zero equity startup accelerator founded in Boston, 2009. They provide global support with 9 accelerator programs, and have several locations around North America and Europe. They normally work with early-stage startups, and are sometimes open to startups in differing markets, however they are more specialized than the average startup accelerator, and focus more on fintech, healthcare, sports tech etc.
AngelPad is a startup accelerator program that is designed for seed stage startups. AngelPad invests $120,000 into every company, and only works with strictly venture capital funded startups. With a total of $2.2bn, AngelPad selects 20 teams every 6 months to work with. A notable alumni company they’ve invested in is Postmates, a food delivery service, founded in 2011.
The Company Lab
The Company LAB consumer products Accelerator (CO.LAB)is a non-profit startup accelerator residing in Chattanooga, Texas. This startup accelerator solely supports startups and entrepreneurs in Texas and specializes in consumer-packaged products, for example prepackaged food and health and lifestyle goods. This is a 12 week accelerator program, and companies must have, at least, a product that has been tested in their respective market.