Angel Round Vs. Seed Round Funding

Written by Dave Lavinsky

Angel Investors and Seed Investors

When it comes to funding your startup, you have many options available to you. Early on in your business’ development, you will enter two funding rounds: the seed and the angel round. In this article, we will discuss the difference between the two rounds of funding, as well as the advantages and disadvantages of each option.

 

What Is Angel Round Funding?

The angel round of funding is typically the first round of funding for a startup. Angel investors are individuals who invest their own personal money into early-stage businesses in exchange for equity. Though they can invest in any round of funding, they typically invest early on in a company’s development.

In the angel round of funding, a company is just getting started and needs a small amount of money to get off the ground. The average amount is relatively small, usually falling under $500,000. Since the company has no traction or reputation, companies struggle to find funding. Angel investors are more willing to take on this risk than other forms of investors.

Though angel investors can be anyone who has a large sum of money and is interested in investing it in a company, many startups get their funding during the angel round from investors they know personally (such as friends and family, etc.).

 

Advantages Of The Angel Round

Not every company has an angel round, but there are several advantages to this type of funding if you can get it.

  • Angel Investors are More Flexible: Unlike other types of investors, angel investors are more willing to negotiate the terms of their investment. This means that they are more likely to give you the money you need with less equity interest given up.
  • The Business Retains More Control: Most angel investors typically invest smaller sums of money than other investors (such as venture capitalists). This means that you will not have to give up as much equity in your company.
  • They Have Faith in Your Company: Investors during the initial investment angel round have very little proof that your company will succeed. They are investing based on your vision and the potential they see in your company. This can be incredibly motivating for entrepreneurs.
  • Angel Investors Provide Guidance and Mentorship: Many angel investors have been involved with many established companies and will be eager to see your company succeed. Therefore, they may be more than willing to provide you with advice and mentorship as you grow your business and gain funding.

 

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Disadvantages Of The Angel Round

Of course, angel round funding is not without its drawbacks.

  • You may have to give up equity: In exchange for their investment, angel investors will want a portion of your company’s equity. This can be difficult for entrepreneurs who are just starting out and do not want to give up any ownership of their business to private investors.
  • You may not get much money: The angel round is typically a small funding round, where your raising capital just to get your business off the ground. This can be difficult if you need a large sum of money to get started.
  • Your angel investor may not have much experience: Many angel investors are individuals who are interested in investing in startups but may not have much experience with the process. This can be helpful or harmful, depending on the guidance they give you. Furthermore, if your first angel investors are friends or family, this can make the process more difficult if the relationship sours.

 

What Is Seed Funding?

The seed funding is the second stage of funding for a startup. During seed investment, companies receive funds from venture capitalists and angel investors in exchange for equity.

For companies that did not have an angel round or a pre-seed round,seed funding rounds are the first major outside investment they receive. The money received is usually used to cover the costs of product development and marketing.

This round is typically larger than the angel round, as companies have more proof of concept and are further along in their development and business plan. This means that they are able to give up less equity for more money. On average, companies can expect to receive $500,000 to $3 million during this round.

 

Advantages Of Seed Funding Rounds

Like the previous round, there are several advantages to seed funding.

  • Your company is more established: By the time a company reaches the seed stage, it is usually more established than it was during the angel round. This means that it is more attractive to investors, as they have more proof that the company is viable.
  • You receive more money: As mentioned before, seed capital is typically larger than the angel capital. This means that you will have more money to put towards product development and marketing.
  • You can diversify your funding sources: In this round, you can receive investment from a variety of sources, such as angel investors, venture capitalists, and even corporate investors. This can give you the opportunity to receive different kinds of funding and advice.

 

Disadvantages Of The Seed Round

However, there are also some disadvantages to seed funds.

  • You have to give up more equity: In exchange for their investment, investors will want a larger portion of your company’s equity. This can be difficult for entrepreneurs who are not ready to give up a lot of ownership of their business.
  • Your business may not be ready: Seed capital is typically for businesses that have a proof of concept and are further along in their development. If your business is not ready for this level of investment, you may have difficulty raising the money you need.
  • You may have to give up control: In addition to giving up equity, you may also have to give up some control of your company in the seed round. This can be difficult for entrepreneurs who want to maintain full control of their business.

 

Angel Rounds vs. Seed Rounds: What’s The Difference?

The seed and the angel round can seem pretty similar. Both can serve as the first round of funding, depending on when the business sought out funding. Furthermore, both rounds can give entrepreneurs the money they need to get their business off the ground.

However, there are some key differences between seed and angel rounds.

  • The angel round is usually smaller and is funded by angel investors, while seed rounds are usually larger and funded by venture capitalists or other forms of funding.
  • In the angel round, entrepreneurs give up a smaller portion of their company in exchange for the investment, while seed investment usually results in them giving up a larger portion.
  • The angel round is also earlier in the development cycle of a startup than the seed round. This means that companies have less to show investors in the angel round.

Both the angel and seed funds can be beneficial for entrepreneurs. The angel investment can give entrepreneurs the money they need to get their business off the ground, while the seed capital can help them take their business to the next level. It is important to weigh the advantages and disadvantages of each before deciding which round of funding is right for your company.

 

Frequently Asked Questions

The angel round of funding is the first stage of external funding for a startup. This round is typically raised from angel investors, which are high-net-worth individuals who invest in early-stage companies.

The seed round of funding is the second stage of external funding for a startup. This round is typically raised from seed investors, which can include angel investors, venture capitalists, and other investors.

There are a few ways to find angel investors. One way is to use an online angel investor directory. Another way is to attend startup events and meetups. You can also reach out to your personal network of contacts to see if anyone knows of any angel investors who may be interested in your company.

 

During the seed funding round, you can receive angel investment, venture capital, and other types of investment.

 

 

Finish Your Business Plan for Angel Investors in 1 Day!

Don’t you wish there was a faster, easier way to finish your business plan?

And know it’s in the exact format that equity funders like angel investors want?

With Growthink’s Ultimate Business Plan Template you can finish your plan in just 8 hours or less!

Click here to finish your angel investing business plan today.

 

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