Angel Investors vs. Venture Capitalists vs. Equity Crowdfunding: The Main Differences
December 7, 2021
10 minute read
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You’re ready to raise capital but how do you convince people to buy into your idea? We’ve previously looked at the different ways to raise capital in Canada and this blog post will go more in-depth about three in specific: angel investors, venture capital (VC) and equity crowdfunding.
All three depend on others seeing the potential in your company. However, each has its own nuances, including when to utilize the fundraising model and how much capital you can usually expect to receive. They also come with advantages—and challenges.
We’ll look into the best strategies to be successful each way, including lessons from those who have done it before. By the end of this article, whether you’re looking at angel investing, venture capital or equity crowdfunding, you’ll feel more confident in your abilities to raise capital.
An angel investor is typically a high-net-worth individual who provides funding for early-stage startups and ambitious entrepreneurs. In return, they usually get equity, aka partial ownership, in the company.
They are usually sought out at the beginning stages of a startup, providing crucial small to mid-sized investments to help the company grow to the point of seeking larger investments from venture capital firms. Additionally, they are often entrepreneurs themselves, who have valuable business experience and connections.
Finding an angel investor
Given the name “angel” investor, it may seem like a daunting task to find one to back your company. Luckily, they can be pretty accessible.
Your own network
If you’re an entrepreneur, I think it’s safe to say you’ve made more than a few connections in your lifetime. Reach out to your network, including friends and family, to see if anyone can get you in touch with an angel investor who might be seeking new early-stage investment opportunities.
A quick Google search of angel groups or networks in your area can prove to be a promising way to get in contact with a potential investor for your company. Keep in mind that given its nature, they probably receive pitches from hundreds of founders, all seeking the same thing as you. Be genuine in your approach and personalize your outreach.
Good old-fashioned cold call
Okay, maybe less of a “call” and more of a “cold connection.” It might sound bold to seek out strangers and ask for cash, but the trick is in your approach. Rather than flat out asking for money, think of it as building your network. Search for angel investors in your area (you can literally search “angel investor” on LinkedIn), be honest in what you’re trying to build, and see if they’d be interested in learning more.
Plus, if you try this approach and notice you have mutual connections, you can even ask your connection for an introduction instead.
How much is the average angel investment?
This is hard to say, as angel investors have varying net worths and invest on terms agreed upon with each business. So, each investment is unique.
Peter Thiel famously invested $500,000 in Facebook, but that’s much higher than the average angel investment you’d likely receive. This blog post from a former founder turned angel investor estimates that most individual angel investors will give $5,000 to $150,000, with an overall angel investing round ending up between $100,000 to $250,000, depending on how many people take part.
How much is the average angel investment?
Unlike a bank loan, angel investors won’t expect you to pay them back any time soon—not in the traditional way at least. More so, by a nice return on their investment sometime in the future. Through giving up equity in exchange for an angel investment, your repayment comes in the form of building a successful company, which is what you want anyway.
Angel investors can also be strategic partners for not only taking your company to the next level but helping other investors be more comfortable with backing your company. They also likely know other angel investors, making it that much easier to find your next investment.
Jackson Cunningham, Founder of Tuft + Paw, an e-commerce company that specializes in modern, thoughtfully-designed cat furniture, said that securing your first angel investor is key.
“The first person to commit is so critical because then it's easier to get others on board. It’s like, ‘We're already at this valuation, we have somebody.’ So really focus on getting that first person in.”
Cunningham credited Andrew Wilkinson from Tiny Capital as being Tuft + Paw’s first angel investor and getting the ball rolling. It went on to raise $300,000 in late 2019. And it’s since had two more fundraising rounds, raising $600,000 from angel investors in 2020, and $1 million from a mix of angels and venture capital firms in 2021, respectively.
Challenges with angel investors
Angel investors can seem, pardon the pun, like “a gift from above.” They can be the difference that turns a great idea into a reality. That said, there are things to keep in mind before accepting money from an angel investor.
First, as an early backer of your company, they may be inclined to help steer the direction of your business. And since they typically have equity in your company in return for their investment, they have a right to be concerned about operations.
Additionally, they may have high expectations, which turns into pressure for you to deliver. They’re hoping for a return on their investment; you’re responsible for making it happen.
The added pressure to perform may be too big of a burden to bear—and if you don’t live up to their expectations, you can probably expect to never receive funding from them (and potentially their network) again.
To alleviate the risk of these potential problems, seek angel investors with expertise in your area and who believe in your vision for the company. And remember, many angel investors are entrepreneurs themselves and have years of business experience to learn from. They want to see you succeed—heck, they put money behind seeing it happen—so utilize their minds as much as their money.
Tips for securing angel investors
You know how to find an angel investor and why they’re useful, but how do you secure financing from one? Like with any time you’re looking to raise money, make sure you have a great elevator pitch and deck to present your potential investors with.
Due to the nature of angel investors coming in at the early stages, they know that you might not have all of the specs figured out yet. So, they’ll likely be interested in your vision for the business and how the company’s been perceived by the market.
More than anything, remember that, sometimes, it’s not always a good fit. Get comfortable with hearing “no” and don’t take it personally if someone doesn’t see your vision. Dust yourself off and move on to the next. After all, there are an estimated 20,000 to 50,000 angel investors in Canada.
Venture capital is often thought of as the top-tier financing option for growing companies. A form of early-stage private equity, venture capital firms provide capital to startups that are believed to have long-term growth potential. Like angel investors, they usually take a form of equity in return for their investment. Unlike angel investors, they have the potential to inject a lot of money into your business.
Created by pooling the money of limited partners, venture capital firms then spread investments amongst growing companies—typically after they’ve shown a proven record of success.
With that in mind, VCs will require a lot more due diligence than your average angel investor. It’s something that Cunningham was faced with during Tuft + Paw’s third raising round.
“VCs want you to show all the numbers,” he said. “Angels are a little more about the vision. You’ll have a pitch deck that's like explaining your vision and some early traction. But VCs want to see a data room. ‘Show me the numbers. Show me the different customer segments over time.’ They're going to ask for a ton of stuff.”
Finding a venture capital firm
Venture capital firms are pretty easy to find. A simple Google search should find numerous options near you. Plus, thanks to the digital age accelerated by COVID-19, you rarely need to meet in person for pitch meetings these days. You can seek investments from VC firms near and far.
When finding VCs to reach out to, you’ll usually find a list of companies it’s invested in, aka its portfolio. So, you can see how your company stacks up against its previous investments, which can be an indicator of if you’re the type of company it’ll back. But don’t count yourself out if your business is different from a VC’s typical investment; you won’t know if you don’t try!
How much is the average venture capital investment?
Similar to angel investments, VC investments will vary. Venture capital firms themselves vary by size and the amount of capital at their disposal and each investment deal is unique to the company seeking funding, its needs, and its track record. However, the amount of funding venture capital firms can give is much greater than an angel investor. This amount will also fluctuate, typically increasing with each “round” of raising capital. A “Series A” round is typically when venture capital firms get involved.
Receiving venture capital money is often regarded as a confirmation that your business is primed for success. It means that industry leaders see potential in your company making it big. Forbes even puts out a list of the top tech investors called the “Midas Touch” alluding to venture capitalists who turn everything they touch into gold.
In addition to the confidence venture capital money may give you, the money is arguably the most important. Venture capital can provide the necessary funds to help you rapidly expand, explore R&D and become a household name.
Plus, it comes equipped with industry leaders and experts, who can help your business flourish. It’s one of the main reasons why fintech life insurance company PolicyMe decided to raise money through venture capital, as early as its seed round.
“We chose to go the venture capital route because PolicyMe has very lofty ambitions, and we wanted investors who could support our growth into the future. We were also looking for investors with sector expertise, and were fortunate to connect with investors with valuable experience in insurtech and fintech,” said PolicyMe co-founder and CEO Andrew Ostro via an email interview. “This situation provides us the support we need to scale now, but also provides potential for strategic future partnerships. We did consider other options, but because of the complex nature of the life insurance industry, it was more difficult to articulate our approach and value proposition to investors with little relevant industry experience.”
In many ways, venture capital money seems like an obvious route for a founder to go down. There’s just one problem: it can be hard to obtain.
Challenges of raising money via venture capital
On the low end, Statista estimated that Canada had 4,300 active startups in five major cities (Toronto/Waterloo, Montreal, Vancouver, Ottawa, and Quebec City), and that was in 2017! Given that 509 VC investment deals were made in 2020… about 8 percent of companies received VC funding—and that percentage gets even lower when you consider there’s likely more startups today.
Like any investment, venture capital firms invest with the hopes of receiving a return. Given the large amount of money at their disposal, they’re selective in the process of who to give it to. It can take much longer than expected, especially if one’s used to raising money through angel investors.
“I was expecting to go really fast because the first two went really fast,” said Cunningham of Tuft + Paw’s third raising round which included VCs for the first time. “I was like, ‘Okay, let's go, everyone. We're ready! Give us the money.’ But as you graduate from angels who are more comfortable writing $50,000 cheques, you realize that VCs process a lot more due diligence. I talked to a VC who was like, ‘We have a process that can close in two weeks.’ But some take three months. And the problem is, you don’t even know who’s going to respond.”
Ostro echoed this statement, regarding PolicyMe’s fundraising experience.
“At the time when we were raising our seed round, we were a team of only six employees, so it was a very time-consuming process. Especially for a small team, it’s difficult to find the balance of contributing to the team while simultaneously doing all of the meetings, calls, and pitches that are required to raise funds. During the process, we tried to insulate the team so they could stay focused on running the business; otherwise, it’s easy to get sucked into the demands of fundraising!”
Ostro also noted that you can often hear “maybe” while fundraising, which is difficult because it gives you hope but it’s not a guarantee. “It’s almost easier to get a flat out ‘no’ because then you can move on and not get strung along,” he said.
Cunningham estimated that from intro call to making a deal can take upwards of eight meetings. Now imagine doing that with 10, 20, 30 (or more!) VC firms, without the guarantee that any of them will invest in your company. It equates to taking up 30–60 percent of your time, depending on how many VCs you’re talking to, according to Cunningham. So, make sure that your company has the bandwidth to perform both raising and everyday duties.
Like with angel investors, receiving funds from venture capital firms can add to your pressure to succeed. Funds themselves are under pressure to show returns on investments to raise more money to continue doing what they do. This can lead to VCs encouraging companies to spend money and scale faster than they’re able to keep up with. This can lead to burnout, or worse, bankruptcy. It’s estimated that 3 out of 4 venture-back startups fail—but don’t let that deter you from raising capital through VCs. Receiving VC money is a huge feat, but treat it as a means to your next level of success.
Tips for securing venture capital
When it comes to securing venture capital, both Cunningham and Ostro said that you should give yourselves more time than expected.
“The biggest mistake I made was not cultivating these relationships a long time ago, because I thought that existing angels would just keep being there,” said Cunningham. “Always build your VC list, so that when you're ready to raise money, you can like do that. It's hard to go in cold.”
Ostro stressed the importance of allocating proper time to raise capital, “We’d probably start raising a bit earlier on (i.e. before we actually need the funds), to give us more time to manage the process and to afford ourselves more time. Juggling the business priorities with the fundraising responsibilities is tough, and now we better understand this—so we would certainly keep the whole process tighter and more streamlined.”
As you go through more rounds and meet with more VCs, you’ll get more comfortable with your pitch. You’ll also start to notice what questions get asked frequently, so you can better prepare for what type of information VCs want to know. Luckily, you’re talking about your own business, which we assume you’re passionate about, so answering questions should come easily. (If you’re looking for tips on what not to say, Justin Kan, a co-founder of Twitch who now has his own VC fund, recently listed things he considers a red flag when talking with founders.)
The more confident you are in your pitch and your business, the more confident VC firms will be in backing your business. However, as previously mentioned, receiving VC money can be hard. If you happen to hear lots of "no"s or “maybe”s but never a “yes”, know that it’s not the end-all, be-all, for determining a business’s likelihood of success.
When Airbnb went to Silicon Valley to raise startup funding, they reached out to seven of the top VC firms. They were asking for $150,000 in exchange for 10 percent equity; five of them rejected them and the other two never even responded to their email. (Read the emails here) They ended up going to tech accelerator Y Combinator for funding, eventually received a large investment from Sequoia Capital, and have since gone on to raise billions of dollars in numerous fundraising rounds. So, we’d say they did alright despite initially getting rejected from VC firms—and the same can go for you!
Though newer in the fundraising space, equity crowdfunding is quickly becoming a popular way to finance startups and growing companies. It allows everyday investors to back startups for as little as $100, opening up a new pool of capital for founders, while simultaneously allowing everyone to invest in companies they believe in.
When you raise money through equity crowdfunding, you are gaining small investments from a large number of people, rather than large investments from a small number of people (like with angel investors or venture capital firms). You are still giving up partial ownership of your company in exchange for their investments, in an amount laid out by your company in the terms of your crowdfunding campaign.
Saskatchewan was the first Canadian province to allow equity crowdfunding in 2013, while several provinces followed soon after with their own legislations. In September 2020, National Instrument 45-110 was put in place to make crowdfunding rules across Canada the same, in the hopes of making the process easier for both companies and investors.
Finding a crowdfunding platform
It’s important to recognize the difference between donation-based crowdfunding, rewards-based crowdfunding and equity crowdfunding when choosing a platform to host your campaign.
A site like GoFundMe falls under donation-based crowdfunding, with people giving money to campaigns without expecting anything in return. This is usually utilized after an accident or natural disaster. Sites like Indiegogo or Kickstarter can be utilized by up-and-coming businesses to fund their projects, with people usually receiving a product, “a reward”, in exchange for their money. This type of crowdfunding can be useful if you’re not necessarily looking for investors and just want to get an idea off the ground. (Fun fact, fitness phenomenon Peloton ran a Kickstarter at one point!)
Due to the nature of exchanging an investor's money for securities, aka financial shares in your company, you should only run an equity crowdfunding campaign on a registered Exempt Market Dealer. Examples in Canada are FrontFundr and Equivesto.
How much is the average equity crowdfunding raise?
Like with angel investors and venture capital, there’s no right answer to this question. Each crowdfunding campaign will be unique based on a company’s ability to drum up interest in its product or service and how big of an existing community it has.
There is, however, a maximum amount that a company can raise through equity crowdfunding and a minimum and maximum amount a retail investor, aka someone who’s not accredited, can put towards each company.
For businesses, the maximum amount that you can raise from retail investors is CAD$1.5 million during a 12-month period. While investors can invest $2,500 per campaign in 12 months and, if deemed suitable by a registered dealer, up to $10,000. As the company, you choose a minimum investment amount. It can be as low as $100 if you want your campaign to be super accessible and have a low barrier of entry for your community.
Why should you raise from “the crowd”?
Raising money through crowdfunding presents an opportunity for you to build a sense of community in addition to gaining capital. Rather than having your business be funded by those with disposable income, you can have your very users, customers and brand fans become co-owners of your business.
This helps create a sense of belonging and pride amongst investors and can help spread the word about your business through your everyday investors.
Additionally, having a public crowdfunding campaign means that the details of your business can be shared across the country. It’s a great marketing opportunity and can get you in front of the eyes of numerous people who may have never heard of your company before.
In fact, a successful crowdfunding raise can be a confirmation of product-market fit.
After payment solution company tiptap gained 476 investors during a FrontFundr campaign in early 2021, company CEO Chris Greenfield said, “I think it gives your idea and the market some validation. If there are 500 people interested in us [through crowdfunding] then there are five million in the general population.”
This can also be helpful with proving consumer interest if you choose to raise money via venture capital later on. Some companies are even crowdfunding after receiving large sums of venture capital as a way to give back to their customers and build up their community.
Challenges of equity crowdfunding
Even though crowdfunding takes place on a public platform, there’s still a lot of work that needs to be done behind the scenes. While you don’t need to allocate time towards meetings with angel investors or VCs, you’ll still need to dedicate time toward creating your campaign and marketing it once it’s live.
Think of crowdfunding platforms as a marketplace. You put your business there in the hopes that the crowd buys from your “stand”, but there’s no guarantee that they’ll want what you’re selling. Yes, there will be people browsing the site but it’s up to you as a business to attract investors. It’s not good enough to simply be there.
Due to the nature of crowdfunding, you will also have to be willing to share your company publicly, in a way you might not be used to. This can be intimidating but is the ultimate sign of belief in your own company. Something that Mike Hibberd, Co-Founder of proptech company Willow, found out during its successful crowdfunding raise in 2020.
“It is a pretty intense experience. When you launch your raise it’s a very public reveal of what you’re working on. It’s very personal. There is a certain sense of anticipation about how people will receive your idea.” he said. “If you’re not willing to put yourself out there, if you’re not willing to pitch the idea to your friends, your family, or your friends of friends, you should also question whether you should even be doing this in the first place. But, overall, I’d say it was a cool and energizing experience!”
With a successful raise, you might think the challenge comes after gaining new investors—what do you do with that many shareholders?! Luckily, you can use a voters' trust agreement for your crowdfunding investors, which transfers their voting rights to a figurehead designated by the company (usually the CEO).
Arguably the biggest challenge of crowdfunding is its public nature. While the world won’t see how many “no”s you hear from angel investors or venture capital firms, they can see if no one has invested in your campaign. Luckily, we’ve put together some things you can do to best set your campaign up for success.
Tips for raising money via equity crowdfunding
The most important thing to do during a crowdfunding raise happens before you even start your campaign, according to Julien Brault, CEO of Hardbacon. And he should know, the personal finance tech company has done three successful crowdfunding raises!
The trick is to build up your interested investor base before the campaign even starts.
“Build a list of people that will invest in your company,” said Brault. “Ask them how much money they're gonna invest and even for their phone number. If they don't want to give their phone number, there's no way they're gonna give you money.”
Potential investors can be found in your network, your customer base or your online audience. Having a good idea of how many people will be seriously interested in investing in your business from the get-go can drum up that much more interest once your campaign is live.
Brault likens it to opening up a restaurant and having your friends and family visit on opening night. The busy atmosphere and line out the door drum up interest to other passersby and build a buzz around the establishment.
You wouldn’t want an empty restaurant on opening day—the same goes for a crowdfunding campaign.
“I think that's the biggest mistake a lot of people make. They launch it, and they're like, ‘Oh, okay, I'm going to start looking [for investors]. No, you should have a list of people that say they will put money in, and then you convert them.”
To build out that potential investor list, you should work on increasing your online audience in the weeks—or even months—leading up to the campaign launch. Utilize the direct connection to see if your community is interested in becoming a co-owner of your business. That way, when the time comes, they jump at the chance.
Once your campaign is live, it’s time to promote, promote, promote. Follow up with people who expressed interest in the past, take part in Q&As with potential investors to answer any questions they may have, and have pride in sharing the details of the business you’re building!
So which is better for your business?
That’s a great question. Your business is unique, so its fundraising journey will be unique too. There’s no right or wrong way to raise money; you can do one option or the other or you can do a combination of fundraising methods.
Heck, you can even stay completely self-funded and reach success, like MailChimp.
Keep in mind that angel investors are more inclined to help at the beginning of your startup journey, while venture capital firms and equity crowdfunding are better suited for companies that are a bit more mature though.
If you do fundraise, make sure to designate enough time for it, as that was a common lesson learned amongst all founders interviewed for this post. And most importantly, remember that the goal of fundraising is to raise capital, but the ultimate goal is to run a profitable, successful business.
FrontFundr Financial Services Inc. (FFS), doing business as FrontFundr and SMV Capital Markets, is registered as an exempt market dealer in BC, AB, SK, MB, ON, QC, NB, NS & YT. Investing in crowdfunding and exempt market offerings has significant risk. Investors may not be able to resell quickly or at all. An exempt market security holder may also receive limited ongoing issuer information. You should invest only if you are prepared not to receive any return on your investment and/or lose your investment in its entirety.