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 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, 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:
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 They Invest?
How Much do Angels Invest?
Angels typically invest between £10k and £50k, with the average Angel investor 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 £2m-£50m. 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
Angel investors 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.
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?
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 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’, who are leveraged into an instant following of supporters, promoters, and customers, 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, which can significantly increase your campaign momentum and customer acquisition.
So, with an abundance of equity-based options available, choosing one that is best for you, your startup and current situation can prove challenging. The landscape has evolved from a domain dominated by Angels and VCs, so there are more diverse ways to access startup funding, such as the rise of Equity Crowdfunding. By understanding how the options can complement each other and work harmoniously, fundraising becomes far more flexible.