What are the differences between angel funding, venture funding and crowd funding? In what scenarios can they be exploited for maximum benefits?

(My response below, to the above question on Quora)

Different investors participate in different stages of a venture. Angel investors invest at the very early stages – when the founders only have an idea or when the idea is being or has been developed into a prototype. They provide enough capital for the idea to be tested and proven in the market, so that another set of investors can bring in more capital after the model is proven and when the venture needs more money to take the proven model to a wider base.

This next set of investors are VC firms.

????????????????????????????????????????????????????????????????Angel investors are individuals who put their own money into startups that they believe have the potential to become large, scalable and profitable ventures. On the other hand, VCs are firms who pool money from other investors and invest in startups.

Angel investors take the maximum risk, as even the concept is yet to be proven, and hence the valuation they get is much lower than what VCs would invest at. By the time the venture is ready for VC funding, the concept and model is generally proven and hence the valuation is higher than the angel round, though the quantum of capital required at the VC stage is higher.

Crowd funding is just another way of getting angel stage funding. Instead of one or two or a group of individual angel investors investing in the venture, in crowd-funding, startups use online platforms to reach out to a larger number of individuals, who usually invest much smaller sums to collectively provide the capital the startup needs.

Image Courtesy.

Author: Prajakt Raut

Prajakt Raut is the founder of Applyifi.com, and author of the book for startups - ‘Starting Up & Fund Raising’ Prajakt personal goal in life is to encourage and assist a 100,000 people to become entrepreneurs. _____________ Prajakt is the founder of Applyifi - an online platform that provides startups a 36-point scorecard and assessment report on the venture's investment readiness [www.applyifi.com], and helps them improve their odds of getting funded. Prajakt is also the founding partner of The Growth Labs, a platform where growth-stage companies get sharp, incisive advice from senior professionals and experienced entrepreneurs. [www.thegrowthlabs.in] Before starting Applyifi, Prajakt was the head of operations at IAN, founding member of a leading incubator, and the Asia-Director for TiE (2004 - 2007). Previously Prajakt had co-founded Orange Cross, a healthcare services company, and was part of the founding team member of Idealake Technologies. While in college Prajakt had founded a printing business and has spent over 10 years working in leading advertising agencies. Prajakt’s book, ‘Starting Up & Fund Raising’, helps startups understand an investor’s perspective, and helps them improve their odds of getting funded. The book also helps entrepreneurs understand the building blocks of a business.

2 thoughts on “What are the differences between angel funding, venture funding and crowd funding? In what scenarios can they be exploited for maximum benefits?”

  1. Nice & lucidly elucidated.

    I’d like to add that going the crowd sourcing way also subjects the entrepreneur and his idea (if it still comfortably sits in the ideation stage….) to absolute openness. Simply put, more people to discuss with the idea to and most often with investors out there “online” with very little risk cover for how much exposure the idea has to leverage upon.

    But all said and done, its risk taking all along the way, and one never knows where and how much to push on for and make things transparent. Sometimes anchoring on that instinct might work but the trick is know when and how much to anchor too!

  2. The founder’s game?in all this – idea stage is one foot in whatever quagmire, angel’s demand the other foot in in exchange to keep you running on your two! VC’s come in flashing that index card of …..ROI at x times else to be thrown out with valueless options!! in any case …..as the stages grow in concentric circles to widen…..the founder gets to see lesser of his stake which is alright since his idea is cooked into that dish that sells well anywhere and everywhere probably by now and so….he could very well be dispensed with!
    ideally crowd sourcing is nice but really too much noise too early (way too much of inputs and decisions that hamper any contructive progress!)- and sometimes might lead to heavy distortion of the dish that was originally envisaged……personally its best if the founders get the venture off the runway! and then anyways whether they invite or not, everyone will claim their rightful piece of the pie………..! but really entrepreneurship is one heck of a fun and challenge ride and for all the 99 that didn’t make and get to sell his pizza, there is always one more that’ll be baking in the oven!!!!!!!!!!!!!!!

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