With a variety of ways to fund your startup, all carrying
their own pros and cons, knowing which one is right for your business can prove
a challenge. Previously an arena dominated by Business Angels and VCs, startup
funding has become more diverse and segmented in the past decade. Now it is
easier for startups to raise capital from more than one source simultaneously
than before.
Three sources most commonly considered are Equity
Crowdfunding, Business Angels and VCs. But they are not exclusive of each
other, particularly when you consider the Equity Crowdfunding option. This
guide will help you weigh up the three options, and how they can work together.
Let’s start off by defining each option:
Business Angels invest as an individual, or as part of a
syndicate (a group of Angels), who invest capital into businesses, and
occasionally provide experience and knowledge to help startups achieve success.
VCs invest in startup ventures using funds raised by limited
partners such as pension funds, endowments, and high net worth individuals.
They also bring with them a significant amount of knowledge and experience to
the companies they invest in.
Equity Crowdfunding enables a group of investors (the
‘crowd’) to invest capital through an online platform, in exchange for equity.
As opposed to a single investor, or a small group of investors, this form of
fundraising can involve hundreds or thousands in a single raise.
So, What are the Differences Between Angels, VCs and Equity
Crowdfunding?
How Much do Angels Invest?
Angels typically invest between £10,000 and £50,000, with
the average Business Angel investing a median of £25,000 according to the
UKBAA. Angels invest personal finances into startups, whereas VCs invest
through managed funds (this can be private or public money).
How Much do VCs Invest?
Since they are drawing from a large pool of resources, VCs
invest larger sums than Angels, usually between £2,000,000-£50,000,000.
However, if Angels invest as part of a syndicate, larger amounts of finance
above £1.5m can be raised.
Additionally, there are also Micro VC funds, which are
smaller forms of a traditional VC fund, and focus on seed and pre-seed stage
startups, typically investing between £20k-£400k.
How Much Can You Raise Through Equity Crowdfunding?
The short answer is that in the UK, startups can raise up to
the equivalent of €8m on Equity Crowdfunding platforms like Seedrs.
However, where Equity Crowdfunding really comes into its own
is its capability to aggregate a variety of investment sources into one funding
round. It doesn’t need to mean turning away Angel and VC money. So, if that’s
£10 from 50 of your friends and family, £10,000 in contributions from your
consumers, or a £100k capital injection from a VC, the accrued value of these
sources can result in a substantial investment into your startup, which in
total, can even exceed the €8m as part of a wider round.
For example, in 2018, TransferGo raised €11.3m on Seedrs,
through a combination of VC investors and over 1,000 crowd investors, showing
how you can combine multiple investment sources – more on this later.
Who They Invest In
Business Angels will generally invest in earlier stage
businesses, whereas VCs look to invest in startups with proven business models
that are looking to scale (albeit this can vary depending on the focus of the
VC firm). With a high cost of administration and a necessity to be highly selective
to ensure a return on the fund (up to 40x), VCs are more risk-averse than
Angels, so make fewer small investments in startup and seed-stage companies.
Conversely, Equity Crowdfunding is suitable for startups of
all stages. Raises on Seedrs start at a £50k minimum raise and extend up to
multi-million-pound raises, enabling you to raise investment; whether you’re
looking for seed capital or Series A onwards. In 2018, there were successful
fundraises across 17 different sectors, and 12 different countries, due to the
diverse nature of the investor community.
Investor Involvement
While Angels may provide advice by taking a role on the
board and introducing you to important contacts, their primary responsibility
is to supply you with financial support. So, their degree of involvement
depends on their own disposition, as a passive or active Angel.
Active Angels will typically play a significant advisory
role and will be actively involved with the startup post-investment. However,
passive Angels, usually as part of a group of investors, are not expected to
have any direct active involvement in the business they are funding in.
By contrast, VCs will always tend to demand a high level of
involvement in your startup, often requiring a seat on the board, to have more
control over the high return they’re seeking. While this can be a tremendous
benefit to your startup, their control and oversight on your management can be
a strain.
Crowdfunding enables thousands of supporters to invest
capital in your business; in 2018, 72.5k investments were made from 60
countries on the Seedrs platform. A high number of investors and a large
shareholder base usually results in a heavier administrative burden; however,
owing to our Seedrs Nominee, there will only be one name on the cap table. This
doesn’t mean you get no ongoing value from your crowd investors. You’ll have a
dedicated post-investment discussion forum to interact with your new advocates.
Plus Seedrs will be on hand with our Seedrs Alumni Club.
How Long Does it Take to Raise Capital?
Due to a (typically) significantly larger sum of capital VCs
invest in startups, compared to Angels, they spend a longer time to evaluate
their involvement with you and complete their research and due diligence. Since
Angels are operating alone, or in smaller syndicates with personal finances,
they can make decisions quicker than VCs who be more bureaucratic.
Timescales to raise capital from Crowdfunding varies from
platform to platform. However, as a rough guide, once Seedrs has accepted your
campaign, it will take about two weeks to review and work with you towards a
private launch (which can last 14 days). After this, your campaign will be
launched publicly for 40 days. When a successful campaign reaches its target,
it will take a couple of weeks to transfer the amount raised once due diligence
has been passed.
Combining Business Angels, VCs and Crowdfunding
As mentioned earlier, you are not limited to a single source
of investment, and as set out in our post ‘why your funding round can never be
too crowded’, Seedrs often work with VCs, Angels and other sources of capital
for meaningful capital injections into growing startups.
For example, our Anchor Investment Service connects startups
looking for a larger cornerstone investor with relevant institutional investors
from our network (including Angels, VCs, and Family Offices). In 2018, the
service secured over £17m in investment offers for 15 businesses. So, what are
the benefits of combining Equity Crowdfunding with Angels and/or VCs?
Firstly, they validate each other. In particular, investment
in your startup from an esteemed VC or Angel will send a positive prompt to the
‘crowd’, and it’s a great validation of your business plan and ambition. In
like manner, a campaign supported by thousands of investors act as the answer
to VC’s and Angels’ utmost question: “will people buy this product or
service?”.
Moreover, by combining the expertise and knowledge of
institutional investors and the ‘crowd’, you can reap greater rewards through
beta testing and feedback. All from people with a vested interest in the success
of your company.
In many instances, an institutional investor may not have
the conviction to go all-in on your round. For example, you are raising a £3m
round, and a VC wants to invest £2m into your startup, but they aren’t willing
to invest anything unless you’re able to secure the rest of the round. This is
where Equity Crowdfunding can step in by raising the additional £1m from the
crowd.
Equity Crowdfunding can also push those hesitant investors over the line if they see your campaign gaining momentum, which acts as a validation of your business. At Seedrs, we offer bespoke marketing packages and exclusive deals on promotional activity that includes digital marketing, email marketing and dedicated PR. This can significantly increase your campaign momentum and customer acquisition.
