By Harshdeep Rapal
Before the arrival of the computers and later the internet, most of the enterprises were either based on manufacturing, trading or providing physical services. It took a good amount of time and money to take the idea from the drawing board into the hands of the first customer. Take for example, back then; a start-up could easily employ 10-15 employees even before getting its first customer. Even when the first computers came, it was still very costly to acquire or lease a computer and build a team to work on it. Even if the entrepreneur was able to start a business, it was an uphill and often very slow process to generate demand and scale up operations.
The last decade and a half has seen the computers becoming affordable, internet reach becoming wider and tools to 'build' the idea getting cheaper. The affordability of the machinery (bought or rented), the computers and the internet, has drastically reduced the cost of creating a prototype and building a start-up team.
Having said that, a start-up still needs money to kick-off operations and become functional. Of the different type of investors around the start-up ecosystem, I see the Angel investors gaining more significance over VCs when it comes to initial investment.
The Venture Capitalists
The Venture Capitalists dominate the scene when it comes to investing in new ventures. Generally the VCs are process driven and have a long 'Due Diligence' process. They also like to invest an amount which falls in their 'investing range' and also may want a 'Board Seat'. On the other hand a start-up which requires just a 4 member team and software tools worth a couple of hundred dollars and a small place to work for a couple of months to create a prototype, might not want to go through the due diligence process or offer a board seat- they might not even have thought about constituting a 'Board'! Also, the amount of money required to start-up and scale might not be large enough to fit into the investing matrix of a VC.
So what do the start-ups do?
Enter the Angels!
The lesser amounts of initial funding required these days to start-up (which means a lesser risk to the investor in case the start-up fails to take off), has induced more investors in the start-up ecosystem. We call them the 'Angel' Investors.
The Angel Investors generally invest much lesser amounts per start-up than the VCs. Angel investors are typically well-connected, wealthy individuals. They have a much shorter or no due diligence process. For a start-up looking for small yet quick investment, Angel Investors become the automatic choice.
So, Angels are here. And, they are here to stay. The lesser amounts of money required to invest in start-ups today and the bigger risk appetite of the Angels, has made them very important to the start-up eco-system. They are the ones who germinate the seeds of entrepreneurship.
So what makes Start-ups prefer Angel investors over VCs?
There is no hard and fixed rule which separates the Angels and the VCs. VCs behave like Angels and vice-versa all the time. Sometimes the investor participates in one or both the funding rounds- As an Angel or a VC- what marks them out is the 'intent'. So, if you are 'starting-up' and are looking for investment, just check on the intentions of the investor.
There are two simple differences between how the Angels and the VCs look at a start-up.
1) Company Vs the Product: Whereas VCs come with a bigger investment, they are more committed to the creation of the company and guiding the entrepreneurs, the Angel Investor helps developing the product, or, as we say- prototyping the idea.
2) Starting-Up Vs Scaling: The Angels help in kicking off the start-up whereas the VCs are more interested in achieving 'Scale and Growth' for the start-up.
So, if someone is looking for scale and growth, VCs are the 'to go' investors. The VCs also bring in their experience, contacts and also the early adopter customers. The Angels will just give you the money and generally do not involve in mentoring. So, take your pick. Carefully!
Harshdeep Rapal is a Senior Manager with HCL Technologies Ltd and has extensive experience in Business Strategy. He also involves in mentoring start-ups and guiding entrepreneurs.
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