March 1, 2004
Q:Can you tell me what’s the best source of financing for a startup company and what’s the difference between a venture capitalist and an angel investor?
Via the Internet
A: There really is no “best” financing source for startups. All have their pros and cons.
One thing you need to understand is what stage your company is in. You say you need financing but you’ll have to keep in mind that the stage you’re in will determine the kind of financing you need. From your letter, it seems like you are in the first stage and need seed capital rather than startup.
- Seed capital is used in the initial research and planning stage of your business.
- Startup capital is for operating expenses — equipment, rent, supplies, etc., for the first year or so.
- Expansion capital is when your company is ready to purchase bigger and better equipment, move to a larger facility, or hire additional employees.
- Bridge capital closes the gap between your current financing and the next level of financing.
To answer your other question, a venture capitalist is a professional investor who manages a fund and is looking for suitable investments. An angel investor is an individual who, while looking for a suitable investment, is also looking for a personal opportunity.
I recommend Attracting Capital from Angels: How Their Money and Their Experience Can Help You Build a Successful Company (John Wiley & Sons; $34.95). This book will help you identify legitimate financiers and how to sell them on your business plan.