Difference between Angel Funding, Seed Funding & Incubation
Every entrepreneur needs some kind of funding as the company grows. Although I still believe that bootstrapping is the best thing to do, it is not always a matter of choice for businesses with a long ramp-up to profitability or for a capital-intensive company.
First, we need to understand the venture capital term. Venture capital is a form of private equity. It’s one of three major sources of equity that is invested in businesses by private individuals – not through public markets. The other two forms are angel investors and private equity firms. Let’s dig into the differences between angel investors, incubation, seed funding and private equity firms.
Angels are often retired investors or executives who would like to enhance their interactions and networks and keep up-to-date with innovations in the industry. But beyond the pure money return, they are inspired – they want to act as mentors for the next generation of entrepreneurs.
Most of the angels are accomplished individuals who invest in a personal capacity. This could be done on its own or in a syndicate (more often). Typical investment size can range from $10 K to $1Mn anywhere. Sweet spots range from $100 K to $400K. They tend not to care about power so much and would love to help whenever possible.
An increasing number of angels form angel groups or networks in order to pool their expertise and financial assets to make bigger and better investments. Technology, press, education, technology, retail, and financial services were among the top business sectors preferred by angel investors in 2013.
Angel investors typically provide seed funding, but they don’t like investing until the business owner displays commitment by placing their own assets at risk. In 2013, angel contributions totaled $24.8 billion, according to Jeffrey Sohl of the UNH Center for Venture Research. The money supported 70,730 companies, representing a rise of 8.3 percent from 2012.
It’s theoretically a word given to the first investment round. That said, people have begun to use it literally as a term for a formal A-round pre-series. This could be by angels or VCs (compared to their typical size) putting in a small check. It’s typically a $2mn round sub.
I wonder how I look at it…. If proper due diligence is conducted, the people involved are professional investors, and I’d call it a seed round, a formal process.
On the other hand, the angel might just have spoken to you on the phone in an Angel round and sent a text the next day.
A business incubator is a company that provides services such as management training and office space to help new and start-up companies expand. Business incubators vary in their commitment to start-up early-stage companies from research and technology phase. Usually much less money (sub $100 K) and a lot more emphasis on physical space, interacting with mentors, events of the classroom kind, etc. are basically made available. It is mostly relevant to startups in the pre-seed funding process. Nowadays, many colleges in India have their own incubation centres functioning in their college premises to mentor fresh startups from within or outside the campus.
Private Equity Firms:
Private equity (PE) companies raise funds from high-value individuals and institutional investors including pension funds, insurance firms, and endowments. In a large cross-section of industries, they later invest these funds. These investments, however, are much smaller in size than those made by angels and VCs. When one investment fails, it could ruin the entire PE fund.
Most PE companies are concerned with mid-market transactions ($50 million to $500 million) and lower market transactions ($10 million to $50 million).
They are looking for existing companies that are prepared or under-optimized for development. We aim to help a healthy company accomplish its corporate plan or by providing the necessary funds to improve its products and services.
Regardless of what kind of funding you’re searching for, note that all investors expect liquidity events to reap their income. You should be mindful of the aspirations of your investors for an exit. The term sheet will usually specify the specifics, the goals you need to meet, and the timeline to reach them. You and your shareholders may mutually decide to sell the business to a strategic buyer based on how your company is doing and your vision for its future, which could be another person or other entity.
You may decide to seek additional expansion capital from VCs in a new round of fundraising if you have raised funding from angels. You and your investors could also use an initial public offering (IPO) to obtain equity capital. Be sure to discuss and appreciate the exit strategy of your investors before accepting their assistance. Your target should be a final win-win.
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