Venture Capitalists Vs Angel Investors - Are Both Necessary For A Start-up?
A start-up is an enthusiastic attempt to scale the heights of success through a product offering which stands out in the market. There are many which fail in a few years of their inception due to lack of business acumen, the flow of capital, and inadequate infrastructure. However, there are a plethora of others who make it to the top with the support of investors. In fact, there has been continued growth in the start-up segment in Canada over the years. The boom is not limited to new ventures; there has been a significant rise in acquisition of businesses for sale in Toronto as well. The confidence of entrepreneurs has increased, product innovations have reached another level, and collaborations among investors are giving shape to a galore of new ventures. Many start-ups have bloomed into flourishing enterprises that have taken the world by surprise due to their global expansion and innovative technology. Home-grown companies like Slack, Hootsuite, and Shopify have changed the economic environment with their unprecedented growth over the years. This aggressive growth has increased the demand for capital, and consequently, the supply from investors who are more confident about the potential of the entrepreneurs and the positive health of the economy. According to Startup Genome’s 2017 global start-up ecosystem report, Canada is home to two of the top 20 start-up ecosystems in the world. Vancouver and Toronto were ranked at the fifteenth and sixteenth position respectively in the report.
Recently many high-growth Canadian start-ups have witnessed an influx of American tech workers post elections and the formation of the new government under President Donald Trump. This has come as a welcome change for the Canadian tech companies who have been on the lookout for talented engineers. The continued growth and momentum have created a favourable environment for future development, and the landscape for start-ups has become more safe and secure. The country is making astounding advances in the AI and tech sector and has been growing by leaps by bounds by developing new technologies, investing in research, and tapping the potential of a talented population. The focus has shifted towards life sciences and robotics due to the presence of world-class universities in the country. Toronto witnessed an investment of $976 million spread across 115 deals in the tech sector in 2017. The state has also received a lot of international investments in the AI segment and will continue to capture the attention of global investors in the coming years. Another study revealed that Canada has the highest number of student-led start-ups in the world. It further stated that the country had the fourth largest number of start-ups founded between 2001 and 2016. The backing received from start-up accelerators and incubators is a contributing factor in the increase in the number of new endeavours. Plus, seed and angel funding is further propelling their growth with a focus on innovation.
Let us discuss the two types of investments at length to better understand their importance in the life of a new business or an existing business for sale in Canada.
Angel investors are high net worth individuals who invest their personal capital in an early stage company and receive equity in return. Besides providing funds, these veteran businesspersons also offer their advice and managerial expertise to the start-ups. Angel investment in Canada typically goes up to $100,000 for a holding period of 5 to 8 years with an estimated after tax return of 30 to 40% per annum. Since these individuals come into the picture at the seed stage of the venture, this becomes a riskier option because the success of the business is yet uncertain. These are industry experts who may have taken a liking for your business idea or believe in your administrative instincts. They are not as fussy as the venture capitalists when it comes to putting in their money in a revolutionary business idea. They usually follow their intuition by either investing individually or with a group of other investors forming an angel fund or syndicate.
Angel investors are usually entrepreneurs who wish to share their knowledge with others and mentor new entrepreneurs while their businesses idea takes shape and starts moving in the positive direction. Their investment decisions are based on their gut feeling, the founding team’s potential, and the anticipated prospects of the start-up. Their main aim is to give back to the society rather than making higher profits.
Venture Capitalists are firms which invest in companies that are in their growth stage to make them more profitable and help them develop further so that both parties can gain from the deal. These firms get the money for investment from varied sources such as individuals, corporations, foundations, pension funds etc. Venture Capital firms invest this money into high-growth potential businesses and get the shares in return as well as involvement in the running of the enterprise. The venture capitalists are a source of capital flow for start-ups as well as existing businesses for sale in Calgary. After a few years, these firms sell the shares back to the entrepreneurs to make a profit on their initial investment. They usually invest a bigger amount in the companies as compared to angel investors and play an active role in monitoring the company. They take a longer time to decide whether to invest in the company or not. They carry out thorough research and due-diligence before giving a green signal. Venture capitalists invest only when they are sure of profits coming in the future from the deal. Their only aim is to make money and get a high return on investment.
Angels Vs Venture Capitalists
The two differ from each other in many ways, such as:
1. Angel investors have a small amount to supply, usually less than $1 million whereas venture capitalists put their money in multi-million dollar deals.
2. Venture capitalists have money pooled in from various investors who do not have control over the investment made by the firm, whereas angels are individuals who have complete power to decide the fate of their money.
3. Angel investors limit their interference to consultation and mentorship whereas the venture capital fund managers are actively involved in the monitoring of the business.
4. The ownership stake of venture capitalists is much higher than angel investors who get a few shares in the company.
Are Both Necessary For A Start-Up?
The answer to this question is ambiguous because it depends on the choice of the entrepreneur. There are many Fortune 500 companies which have succeeded through funding, and there are many other successful businesses which have not received any capital flow from outside sources. Investments do help a business to expand and grow further, but an ideal approach to make your way up is to finance the company through the revenue generated from the sales. This is true for start-ups as well as established businesses for sale in Montreal. Angel investors can prove beneficial as they are inherently interested in nurturing your business idea and offer seasoned advice. On the other hand, venture capitalists are more inclined towards the margins and profitable balance sheets. The entrepreneur must scrutinise the investor before getting into an agreement as it should turn out to be a fruitful partnership rather than the one that leaves a bad taste in the mouth.
Endnote: If you have a brilliant idea for a start-up or need capital for acquiring an existing business for sale in Canada, you must choose wisely as the investors will become a part of your company. Make sure to assess the market value of these investors and pick one based on your requirement.