In this opinion piece, investor Pip Wilson discusses why seeking funds from angels may be the right option for your tech business.
Angel investment is versatile. Angels come in many shapes and sizes and put money into companies for many reasons. Some seek greater returns than they would get from more traditional investments such as stocks and shares. Others might want to take advantage of tax incentives and schemes such as EIS and SEIS. For entrepreneurs and small business owners, angel investing can be an excellent way to prove concept and gain traction. But like any other form of funding, it isn’t right for everyone.
The benefits of bootstrapping
Not all early-stage businesses require external capital to get going. In fact, the vast majority get off the ground with only personal funds or with help from family – this is known as bootstrapping. If you can afford it, then bootstrapping affords you a huge amount of autonomy commercially, practically and creatively: bootstrapping allows a lot more freedom when it comes to decision making, and the focus is directed towards a single goal.
But it has its limits. Maintaining the capability to cope and perform under an increased or expanding workload is more difficult. You might reach the point of putting your product to market but in order to consolidate your position, you need to have the equipment, labour and processes in place to grow and handle the demands that come with growing, and this takes more money.
Nevertheless, all companies should look to bootstrap for as long as possible, especially until they have proved there is a market for their product.
For those that find bootstrapping impractical because outside capital is a must, there’s also crowdfunding, but this carries its own risks. Crowdfunding only tends to work for business-to-consumer (B2C) businesses, and therefore any entrepreneur or small business owner seeking this kind of investment needs to have a large consumer base.
There are examples of how crowdfunding can be wildly successful. Oculus VR, one of the pioneers of wearable virtual reality hardware, began as a Kickstarter campaign and was later acquired by Facebook for a staggering $2bn. But the process is time-consuming and labour-intensive, and time spent marketing a crowdfunding campaign is time taken away from work on the business itself.
Raising from VCs
Venture capitalists are your best bet if you need a large sum of money. Some angels do rival VCs in the amount of capital they’re willing to invest but they can be harder to find. Larger businesses and those that need this size of investment tend to opt for VC funding, but winning this kind of funding is tough.
There are numerous inherent biases in the VC space. Female-led startups receive little investment from those in the VC space, and as I’ve written about many times before I believe a lot of the issues relating to diversity in tech have their roots in VC firm culture. What’s more, the accelerator and incubator programmes preferred by VCs are hugely time – and labour-intensive, which instantly excludes parents who cannot be away from home for the 60 or more hours of the week that are almost universally demanded by venture capital investors.
But that isn’t to say it’s a bad option for everyone. Uber, for example, scaled rapidly so it could dominate the market in multiple cities and avoid competitors or copycat operations taking their business. It was able to do this due to the millions of investment capital it received from venture capital funds. This rate of scalability would be hard to achieve for a founder that is bootstrapping their startup.
The variety of angels
If your business needs investment but you are not one of the tiny minority that VC funding is right for then angel investment might be best for you. Angels are many and varied, which means you can choose an angel based on your needs, your personality and your philosophy. And because angels invest their own money, and therefore have a greater emotional investment in the business than VCs, they come with advice and guidance that help you to scrutinise your decisions and make better ones. Angel groups, which are usually tailored to a specific type of business and have more money to invest, are ideally suited to those who need a lot of money but don’t want VC investment.
For anyone with a business of any size, looking for investment can be an intimidating prospect but there are many options available. Often, founders see raising money as their ultimate goal, but actually, running a sustainable and profitable business is the real success. Investment is just a way to help businesses to expand more quickly. What’s most important, therefore, is not to seek out funding in any form, but to find the right kind of investment for you and the needs of your business.