What do Angels and Venture Capitalists have in common?
Have you often wondered what the difference is between an Angel inventor and a Venture Capitalist? There really isn’t much difference except for the size of the investment in your business.
Angels are private investors who are looking for a better investment and return than traditional investment schemes, like in the stock or bond markets. The age of the company and other specifics are on their checklist: early or formation stage and they look for a payback and a return on their investment where revenues are between $2 million and $10 million. They would usually expect preferred stock in return for their money which would pay semi-annual interest for the use of their money. After 5 to 7 years they would expect to be paid back and exit.
Venture Capitals are on a higher plane than Angels and can be private equity funds. They invest in early stage companies expecting a high return for the high risk involved where revenues are in excess of $10 million. Venture Capitalists look for companies with a defensible market position, strong management team, positive EBITD and discernible growth characteristics.
So what do these Angels and Venture Capitalists look for, you may ask? Think about the program Shark Tank seen on ABC-TV on Friday nights. You may have seen Angel investor Kevin O’Leary quizzing the presenting owners of small companies. He asks, “How am I going to increase my investment?” “What are your goals for the business?” “I don’t like your valuation!” “What are your margins?” “What are your sales and in what timeframe?”
What is making him salivate or not over the company’s products? These attractions are not unlike what the Venture Capitalist looks for. Take a look at the following:
1. Unique or proprietary products or services. A patent owned by you is a plus.
2. Existing sales are evidence of consumer demand where revenue growth is greater than 20% to 50% year to year; gross margins are over 40%; and with a lean management team.
3. Increasing sales would be the result of their investment by marketing or hiring additional personnel, which they will oversee.
4. Realistic valuation based on your sales and profits
5. Exit strategy must be included in your plans, like selling the company or merging with another company.
While some of you may say that seeking funding from these people is not worth it. Think of this. If you did not have their investment you would not be able to grow your business faster, gain market share and have the benefit of their expert opinion and management expertise. Their contacts and relationships would help you gain clients and suppliers for increased revenue and growth. So it is worth it, but make sure that you benefit from the relationship as much as the investor would. It is a two way street.