How To Get a DBA: A Step-by-Step Guide
ByDragomir Simovic
June 10,2022
If you’ve ever tried to set up a business, you know how difficult it can be to decide on the structure the business should take. Once that’s out of the way, it’s time to work on branding, at which point you need to choose a name. Many business owners don’t want to associate their names or surnames directly with their brand; instead, they’ll use a “doing business as” name (DBA).
In this article, we’ll explain what a DBA is, how to get a DBA, why you might need one, and any other related issues that might be causing you confusion. We’ll get right into it with a definition.
DBA Definition
A DBA is a pseudonym or alternative name that differs from the legal name of the business or that of its owner(s). It can be used to refer to the business as a whole or partially in instances where the owner(s) want to operate the business under a name other than its legally registered name. It’s also referred to as a fictitious business name, trade name (in Colorado, for example), or assumed name, depending on your location.
A DBA doesn’t have anything to do with a business’s structure; it’s merely an official nickname used to present a brand to the public. A sole proprietorship, partnership, LLC, or any other business structure can get a DBA.
One famous example of this is Meta, Facebook’s newly renamed parent company. The company’s legal name is Meta Platforms, Inc., but its DBA is simply Meta. The original business entity and structure remain the same, but once the business owners create a DBA, they can market their company much more effectively using the DBA name.
DBAs are not separate legal entities and will not offer you any asset or liability protection, no matter your business structure. They do, however, allow you to receive payments, open bank accounts, and market your business under that name.
You may or may not need to register your DBA; this varies by state. It’s also important to note that DBA registration is not the same as registering a trademark; upon registration of your DBA, you should bear in mind that the additional rights and benefits associated with trademarks don’t apply to DBAs, unless you go through a separate trademarking process.
Registering a DBA
So, how do you go about registering your DBA? In the USA, you can do this by filling out the required paperwork and paying the filing fee at your local, state, or county agency, depending on the state.
In this section, we’ll answer some questions associated with registering a DBA to give you a better understanding of how it works.
Who Needs To File a DBA?
Although businesses can go without filing a DBA, having a trading name can be great for branding purposes. Any formal or informal business that intends to trade under a name other than their legal one - or that may do so in the future - needs to file a DBA in most states. This is to prevent random “businesses” springing up under false names to defraud unsuspecting individuals.
The main purpose of DBA filing is to prevent such cases of fraud. Once registered, the status of the business, its structure, and its ownership become clear not only to clients, but also to the state authorities where the business is registered. This way, everyone knows who they’re dealing with, especially if and when legal issues arise.
DBAs are potentially more useful for partnerships than for sole proprietorships, simply because without a DBA, the business name will carry the surname of all partners. The more partners there are, the messier this can get.
A “doing business as” (DBA) name is also advised for formal business structures like an LLC. That way, if the business owner(s) want a rebrand, changing their DBA is much easier than filing for a legal name change.
What Names Can Be Used as DBAs?
You have great flexibility when picking a name for your DBA. It could be an acronym or an abridged version of your own name, a play on words, or an entirely new name. Filing a DBA with a brand new name is common among business entities trying to rebrand or branch out to focus on a single aspect of the business. You’re at liberty to be more specific about the nature of the business through the name of the DBA for the sake of creating awareness.
When Should You File a DBA?
You don’t have to file your DBA at any specific time, but it makes sense to do so early on, before you invest in branding. Don’t worry, though - even if you’ve been trading for years without a DBA, it’s not too late to get one.
Reasons to get a DBA later on include business expansion, rebranding, requirements from your bank, and bidding for contracts.
The financial status of the company should also be considered when determining when to file a DBA. Registering multiple DBAs at once can get costly, so it’s worth considering whether you really need a DBA and, if so, how many. A better strategy might be to register separate business structures instead of piling up a series of liabilities on one business.
In some jurisdictions, you’ll be required to file your DBA within 30 to 60 days after its first use.
Step-by-Step Guide to DBA Registration
The process for registering a DBA varies based on the state where your business is located or was registered. You should visit the county clerk at the closest registry or the website of the Secretary of State to find out what peculiar requirements apply to your jurisdiction. Your state may also require you to place a local newspaper ad for a stipulated amount of time. The filing fees range from $10 to $100.
You can manage the process yourself or hire the services of a professional to do it for you.
Step 1 - Check business name availability
Conducting a name search by yourself or through the state will show you whether the name in question is available at both state and local levels. You should also be aware of the naming requirements applicable in your state. After you’ve confirmed the name’s availability, you can also conduct a quick web search to see if the URL is available and buy the domain name. After all, your business will likely need a website.
Step 2 - Ensure you fulfill the operating requirements
After securing your DBA name, you may be required by your state to carry out business operations before proceeding with the registration process. Some examples of preliminary operations include printing branding materials like complimentary cards, staff identity cards (where necessary), and brochures.
Step 3 - Complete the necessary forms
At this point, you’ll need to submit your proprietor information, including contact information, telephone numbers, and email addresses. This stage can be completed online. The completed forms can be handed back to the appropriate officer(s) in charge either online or via email. Whether approved or denied, you will be informed appropriately and this concludes the necessary steps to set up DBA.
Other Things To Note About Filing a DBA
1. Restrictions on names
Depending on your jurisdiction and the registration status of your main business, you may not be able to use certain words in the name of your DBA, including “Inc.” and “Corp.” at the end of the name. This will usually only apply if your business isn’t incorporated.
2. Announcement of your DBA
When you start a business and need to find out how to get a DBA in your state, you may want to look out for requirements about announcing your trading name. Some states will ask that you announce your DBA in a local publication for a specific period. This is to create awareness that your legal business name and DBA belong to you and have been duly registered.
3. Certificate of good standing
In some jurisdictions, you may be required to present a certificate of good standing from the office of the Secretary of State before your DBA registration can be accepted. This requirement is mostly for LLCs to show proof of the good standing of the business and its owner(s).
4. DBA renewals
DBAs expire and need to be renewed after a certain period. In the majority of states, the lifespan of a DBA is five years. Take note of the registration date and the eventual expiry date to avoid any dramas.
5. Information change
If the information you provided at the point of the DBA filing changes, your DBA may need to be revised. This can include changes to the structure of the business or to your principal address.
6. Employer Identification Number
To protect your privacy and keep your personal and business matters separate, you’re advised to apply for an EIN. Having this number means you don’t need to use your Social Security number for your business identity.
Advantages of Registering a DBA
1. Targeted branding
When you need to branch out or focus on a certain aspect of your business, you may do so by getting a DBA registered and marketing it to your target audience. You’re at liberty to create separate logos, websites, and anything else related to branding to fit the description of what you’re registering as a DBA. This way, that aspect of the business can stand alone and have a more focused appeal.
2. Privacy protection
Since the legal name of a business is usually the name of its owner(s), it makes sense to apply for a DBA. For some businesses, using a DBA ensures the protection of the owner’s privacy and reduces the number of unsolicited postcards and catalogs sent to your address.
Privacy protection also helps reduce unsolicited calls, most of which probably aren’t from potential customers. Some of those calls may even be prank calls. You should consider creating a DBA if you don’t run a business that requires using your name to give you some form of leverage and boost personal branding.
3. Business flexibility
For a business that already exists and is looking to expand, a DBA affords you the flexibility to do so while avoiding the need to register a new business entity. This flexibility even allows you to expand your business to a region where your legal business name has already been registered.
Flexibility also means that you can decide to use more fun and relatable names for your DBA. So if you haven’t already done so, the time to follow our guide on how to get a DBA is now!
4. Ease of legal compliance
Fraudulent businesses and schemes can wreak havoc, and getting a DBA is the surest way to protect yourself and your business from avoidable legal issues. If you trade under another name in a state where you need a DBA but you haven’t done the paperwork, you’ll be in trouble.
The last thing you want is to end up defending a lawsuit that could have been avoided by filing the correct ‘doing business as’ paperwork. There’s no reason not to; it’s quick, easy, and not too expensive.
Disadvantages of a DBA
1. Little or no liability protection
Unlike registering certain types of businesses, getting a DBA doesn’t protect your assets from liability if your company gets hit with a lawsuit. The DBA does nothing to separate you from your business; it’s simply a legally recognized alias.
Of course, that’s not the purpose of a fictitious business name. Whether you’re opening an LLC or a corporation, you shouldn’t rely on your DBA for protection.
2. Maintenance difficulties
Managing too many DBAs under one legal business entity can be a hassle, especially when you’re planning on doing business internationally. That’s because some other countries will also require you to file registration of trade name paperwork.
When you have to repeat that process for multiple DBAs across dozens of countries, then keep on top of renewals, there’s every chance some important admin could slip through the cracks and cause you some major headaches.
3. No extra tax benefits
When you register a business name in the form of a DBA, you’re only getting an alias you can use for clearer branding. You shouldn’t expect the DBA to affect your company’s tax status - that all comes down to your business structure.
4. Lack of exclusivity of business names
Seeing as a DBA is not a trademark, it doesn’t offer you exclusive rights to the name you have chosen; it only allows you to conduct business under that name. This means that multiple businesses can conduct business using the same or very similar DBAs. By extension, you can’t use DBAs for legal paperwork, since they aren’t legal entities. It should be noted, however, that you can trademark a business name if you desire some extra protection.
Final Thoughts
Registering a DBA is an easy and inexpensive way to expand your business and create brand awareness. It’s the best way for small businesses to experiment with other goods or services without having to break the bank or go through the process of registering a brand new business.
At the same time, you can also enjoy the privacy a DBA affords you. Now that you know how to get a DBA, we encourage you to follow the steps discussed here and get one if your business needs it.
FAQ
Why would someone get a DBA?
You can get a DBA if you don’t wish to trade under the legal name of your business. Another reason to get a DBA is to expand your business or focus on a particular aspect of it. For instance, a restaurant owner may use a DBA to start a smoothie business by giving it a separate name from that of the restaurant, while still operating under the same legal entity. When creating a DBA, business owners should make sure to capture the nature of the new venture in the name.
What is a DBA vs LLC?
DBA stands for “doing business as.” It’s an alias or fictitious name that an already registered business or company uses to operate if it does not wish to use its legal name. LLC stands for “limited liability company,” a legally registered business entity with a legal persona that is separate from that of its owner(s).
The cost of registering a DBA name is significantly lower than the cost of registering an LLC. This is largely due to the legal implications and benefits of registering both entities. Since a DBA does not separate the persona of the owner(s) from the entity, such owner(s) will not be protected from lawsuits that DBA lands in. An LLC can sue and be sued in its name, without its owner(s) bearing any form of liability.
Another notable difference between a DBA and LLC is that a DBA does not guarantee the exclusivity of your business name, whereas an LLC does. While operating under DBA registration, you may need to take extra steps to trademark your business’s name for protection. Of course, the two aren’t mutually exclusive; you can open up an LLC then use a DBA to operate under a different name
Is DBA self-employed?
DBA and self-employed don’t mean the same thing. As a self-employed individual, you can use a DBA to trade under a name other than your legal business name. Knowing how this works comes in handy if you ever wonder how to get a DBA as a sole proprietor.
About the author
Dragomir Simovic is a staff writer for SmallBizGenius, where he regularly contributes well-researched, engaging content about the latest trends in the finance industry. As a successful entrepreneur and freelancer himself, he knows the ins and outs of running a small business and is eager to share his insights. When he’s not analyzing the latest finance news or thinking up startup strategies, Dragomir likes to play the guitar, discover new indie games, and sample craft brews – responsibly, of course.
More From Our Blog
If you’re planning to start a small business or are already a small business owner, you surely understand the importance of having a business plan. A good business plan can help you build a solid strategy, decide which resources you need, set a budget, and stay ahead of any potential complications that may happen along the way.
Sounds like a dream, but not everyone knows how to write a business plan. That is why we’ve decided to write a comprehensive guide with all the important information summed up. By the end of this article, you should have a clear idea of where to start and how to develop a business plan that will make your business bloom.
What Is a Business Plan?
In short, a business plan is a document that includes your company’s goals and the steps you intend to use to achieve them.
Many entrepreneurs don’t even start developing a business unless they have a business plan set and ready. That’s because it’s important to put all your ideas on paper and see if they make financial sense. If your business idea doesn’t look promising on paper, it’s unlikely it will work in real life. Here are some elements you should think about while writing a business plan:
Product goals
Monthly goals and deadlines
Financials for the first two years
Profit and loss statements for the first three to five years
Of course, as each business is different, you should adjust your approach accordingly. You don’t have to strictly follow any specific rules as long as you have all the fundamentals covered.
Why Is a Business Plan Important?
Business plans are important for both business owners and potential investors, and here’s why. If you’re just starting out, a business plan will keep you focused and help you position your brand. A solid business plan will help you:
Prove that you’re serious about your business. If you have a successful business plan that shows your commitment, your partners and those looking to invest in your company will be confident about doing business with you.
Determine your financial needs. One of the main purposes of any business plan is to help determine how much capital you need and for what. By allocating funds properly, you can plan ahead, which is especially important if you intend to raise additional funding later on.
Understand your competition. While creating a business plan, you can’t only focus on your company. You need to do a competitive analysis and review the market conditions as a whole. Knowing more about your main competitors will help you step up your game and boost your company’s competitive advantage.
Understand your audience. A business plan can help you better understand your customers and what they expect of you. It can help you make better products and services and tailor them to your customers’ needs.
Reduce risk. By following the guidelines set in your business plan, you’re reducing the risk of investing in the wrong opportunities or missing the right ones.
Attract partners and investors. If you’re running a startup, finding prospective investors is the first order of business. Potential investors will be interested to know your goals and how you will go about pursuing them. They will want to see how you plan to manage stressful situations and whether you have an exit strategy. At the same time, prospective partners will want to check your business plan to see how it benefits them.
As you can see, there are multiple benefits to making a business plan. It shows you are committed to your business and helps get funding, bring new business partners, reduce risk, and engage with your customers.
How To Write a Business Plan, Step by Step
Now that you know all the basics and the advantages of a good business plan, let’s see how you can go about writing one. Here is a traditional business plan template:
1. Executive Summary
First things first. Your business plan should start with an executive summary. The summary should include an overview of your company with a brief description of your product or service. It should summarize all your plans, ideas, and logistical details.
If written properly, your executive summary will attract potential partners and investors and convince them to read the rest of your business plan. The executive summary should include a short review of:
Your business concept
Your product description
Your target audience
The marketing strategy
The current and projected financial status
The information about your team
2. Company Description
This is the part of a business plan where you should provide a detailed description of your company, including your company’s registered name and address and information about your products and services. You should explain your goal, what sets you apart from the competition, and what makes your business a good investment.
Here are some of the particulars you should include in this segment of your business plan:
Your business model
Your business structure
Your mission
Your business history
Business objectives
Thorough information about your team and their salaries
3. Market Analysis
Market analysis is one of the crucial parts of business plan writing. By conducting in-depth market research, you will get a better understanding of the current trends and the nature of your industry. It will also help you learn how to outshine the competition, which is extremely important, especially if you’re new in the business.
One of the main questions you should answer in this part of your business plan is how big your target market is and how many people are interested in what you have to offer. That might sound overwhelming, but there are various sources you can consult.
You can do some academic research, check government statistics on particular demographics, or simply observe relevant news outlets. The more information you have, the easier it will be to make an informed decision.
4. Organization and Management
This is the section in the business plan where you should describe the legal structure of your company. You should explain whether you’re running an S or C corporation, or if you’re operating as an LLC.
Furthermore, you should explain how your management team works and their roles and responsibilities. You should describe the hierarchy between all your team members and how each contributes to your vision.
5. Products and Services
Your business plan should also have a dedicated section about your products and services. What exactly is your product? Who is it for? How much does it cost? Why is it better than what your competitors are offering? These are just some of the questions you should answer in this section.
If you’re planning on adding some new products in the future, you should describe them as well and explain how they will contribute to your business.
6. Marketing and Sales
To build a business plan, you need to define your marketing and sales strategy and how you plan to accomplish it. You should write about your sales process in detail and describe how you plan to attract and retain your customers.
Of course, as the market conditions change, your marketing strategy will also change and evolve, and you can always adjust this part of your business plan accordingly.
7. Funding
If your business needs funding, you should include that in your business plan. You should specify the type of funding and how much you need. You need to explain how you plan to use that capital, as that is the information your potential investors will be most interested in. Also, if you have any plans to sell the company at some point in the future, you should include that information as you write a business plan.
8. Financial Plan
Having solid financial projections is probably the most important aspect of any business plan. Even if you have an excellent business idea and you’re invested in it, it won’t mean much unless you’ve figured out how to finance it. Each financial plan should feature a balance sheet, an income statement, and a cash-flow statement.
A balance sheet gives an insight into how much equity you have in your business. Equity is the value the company’s shareholders would get if all of the company’s assets were liquidated and all its debts paid off. In plain terms, the balance sheet will show what you own vs. what you owe.
The next segment your business plan should include is an income statement. An income statement is used to show a company’s financial performance over a given period of time. This statement includes all the necessary information about your company’s revenue, expenses, gains, and losses. So, whoever reads your business plan will be able to see how your business has performed in the past and whether or not it’s worth investing in.
A cash-flow statement is similar to an income statement, but there are some differences. A cash-flow statement shows the source of cash but also helps track all ingoing and outgoing transactions. If the incoming cash is greater than the outgoing cash, your company has a positive cash flow.
And if it’s the other way around, your cash flow is negative, which can be a serious issue. According to some statistics, 82% of businesses fail because of cash flow problems, which is why you should regularly analyze your cash flow statements.
Types of Business Plans
Although there are some general guidelines, each business plan needs to be tailored according to your company’s needs and stage of development. With that being said, there are different kinds of business plans you can go for.
The Operational Plan
An operational plan is a plan that defines how each part of the team contributes to the company and its goals. It outlines the daily operations and tasks for over a year. A good operational plan ensures each manager and employee knows what’s required of them and understands their deadlines.
Operational business plans are very important as they provide a roadmap for managing a business, but they can also be extremely helpful if you’re trying to get funding. They help assign human, physical, and financial resources, making it easier to reach your goals.
The Strategic Plan
The strategic plan is similar to the operation plan, with one major distinction. While an operational plan focuses on day-to-day operations, a strategic plan focuses on the company’s long-term goals and whatever is required to fulfill them. And while these are both action plans, a strategic plan heavily depends on an operating plan and its efficiency.
As a business owner, you need to ensure you have both operational and strategic plans in place, as that will make it much easier to achieve your business mission.
The Marketing Plan
A marketing plan is another business plan example we cannot forget. It is a document that shows how you intend to promote and sell your products and services. It is an outline of your advertising strategy and all your promotional activities for a specific period of time.
Some of the key elements each marketing plan should cover include market research, marketing objectives and activities, the current business marketing positioning, marketing budget, and KPIs that should be tracked over time. Having good marketing can help you raise brand awareness, increase market share, and enter new niche markets.
The Financial Plan
Financial plans are another vital part of any business plan. As the name suggests, this document focuses on a company’s financial goals and the strategies it needs to employ to achieve them. A financial plan is especially important if you’re just starting a business, as it will show whether or not your business idea is profitable.
Each financial plan should include an investment budget, a financial budget, an operating budget, a cash-flow budget, and a personal expense budget. Once you have all this information in place, you should not have any trouble with your business planning and achieving your business goals. Just make sure to review your business plan periodically to see if it requires any adjustments.
Final Thoughts
As you can see, the process of writing a business plan isn’t as perplexing as it may seem at first, and the final product can be very beneficial to your business. By following the guidelines set in our article, you should be able to make a business plan outline and start developing your business strategy. All you have to do is define where your business currently is and where you want it to be in the future.
By Milica Milenkovic ·
December 23,2022
In business, you will frequently come across the term “operating cash flow.” What does it mean, though?
This post will give you the definition of operating cash flow (OCF) and then provide an example. We’ll also discuss two different methods for calculating OCF.
Operating Cash Flow: A Definition
Operating cash flow is the cash that businesses generate during normal operations. Companies receive money from customers and clients and then use it to fund wages, rents, bills, marketing, and other services.
The operating cash flow formula is as follows: net income plus non-cash income, adjusted for changes in working capital, revealing total cash generated and spent in a given period.
Operating cash flow, along with free cash flow and net income, helps companies determine their financial health. It provides a real-time view of their current cash position, regardless of their end-of-quarter profitability.
OCF Formula
To calculate operating cash flow, you can apply the following operating cash flow equation:
Operating Cash Flow = Net Income + Non-Cash Expenses - Increase In Working Capital
You can also calculate operating cash flow per share to see how much revenue each chunk of equity is generating:
Cash Flow Per Share = (OCF - Preferred Dividends) / Common Shares Outstanding
Subtracting preferred dividends (if the company offers them) is essential for calculating this statistic because these shareholders receive cash first.
How To Understand OCF in Accounting
At first, operating cash flow seems like a complex topic. That’s because most people are used to thinking in terms of profit and loss. However, once you understand how OCF works, you’ll quickly see the value it offers.
Operating cash flow enables firms to track cash flows in and out of their business accounts during regular operations. It lets them separate their primary business activities from other factors that influence their balance sheets, telling them how much money they have to play with at any given time.
Operating cash flow, sometimes called “cash flow from operating activities,” is the first section of the cash flow statement. It excludes any investments or financing transactions and includes cash in-flows and out-flows related to:
Selling and purchasing inventory,
Paying staff wages,
Providing services,
Paying salaries and bonuses,
Paying suppliers, contractors, and consultants.
Why Would a Company Use Operating Cash Flow?
The beauty of operating cash flow is how it strips out various factors that get in the way of assessing the core health of a business.
For example, a company may have just made a large sale and is waiting for money to enter its accounts. On its year-end profit-and-loss statement, it will record the sale as revenue, making the company appear healthy. However, if the firm cannot collect the money, perhaps because the client pays late, it has no cash inflows – something that a look at the OCF will reveal.
Even so, operating cash flow isn’t always helpful for measuring the financial solvency of a firm. For instance, if capital spending is high and the company applies accelerated depreciation, the operating cash flow will appear chronically low even if the business has enough cash on hand to meet all its needs.
To remedy this, firms also report free cash flow (FCF). This expanded definition of a company’s cash flow avoids the artificial deflation of its total cash reserves, which often appears after working capital increases are taken into account.
Indirect and Direct Methods for Calculating Operating Cash Flow
There are two methods of calculating OCF: indirect and direct.
Indirect Method
The indirect method of calculating OCF takes net income and applies various correction factors to it, reflecting the status of non-cash accounts, such as accounts payable, accounts receivable, and capital depreciation. The reason accountants call it “indirect” is because OFC is inferred from the company’s net income position.
An increase in accounts receivable, for instance, indicates that the firm has earned money, but the cash has not yet been received. Therefore, it must be subtracted from the net income.
By contrast, accounts payable implies that the company has incurred expenses, but they have not yet been paid. This extra cash would need to be added back to net income to produce the OCF statistic.
Direct Method
The other method is for the company to record all transactions in cash and summarize its cash position for a particular accounting period on that basis. For instance, it might keep tabs on cash paid to suppliers and vendors, workers, and tax authorities when measuring out-flows, and sources of income, such as sales and dividends, when measuring in-flows.
Conclusion
Operating cash flow is a useful tool businesses use to determine their net cash position. It is valuable because it informs companies about their ability to pay for the inventory and services they need right now, regardless of their profitability. However, free cash flow might be more helpful to companies with accelerating depreciation programs.
By Nikolina Cveticanin ·
June 10,2022
Every day, entrepreneurs across the world come up with ideas that might turn out to be multi-million dollar businesses. Regrettably, those lightbulb moments quickly fade if there’s no financing available to see them through. Ideas keep vanishing because there’s no capital to bring them to life.
Fortunately, there is a way to navigate this issue. Our discussion of venture capitalist vs. angel investor will allow you to regard the above scenario in a positive light. We’ll compare angel investing and venture capital, learn their differences, and weigh the pros and cons that should help you choose the right one for your business or startup.
What Is an Angel Investor?
An angel investor is typically an individual or group of individuals with high net worths (surpassing $1 million) who invest in small or growing businesses. Angel investors usually invest during the early stages of a business, either before operations commence or right after. With angel investing, small businesses get a chance to secure seed funding. In return, angel investors can get convertible debt or equity in the business, become part owners and/or shareholders.
The Securities Exchange Commission requires that angel investors be accredited. Accreditation is important to ensure that the investor or group of investors are financially sophisticated. They should also be able to fend for themselves, especially in the event of a loss. In our comparison of angel investors and venture capitalists, we will see that this is one of the most salient points, as it protects investors.
To earn such accreditation, investors must meet either of the following two criteria:
Earned an annual income of $200,000 for two years before the accreditation and has a high chance of retaining such earnings in the future. Where taxes are filed with a spouse or spousal equivalent, the income is pegged at $300,000 annually (a monthly income of $16,667 and $25,000, respectively).
A net worth of over $1 million.
What Is a Venture Capitalist?
To engage in a venture capitalist vs. angel investor conversation, first, we need to look at the definition of a venture capitalist. Namely, a venture capitalist is an individual or corporate entity that invests in small and growing businesses with funds pooled from investment companies, banks, pension funds, and other sources. This means the money invested doesn’t necessarily belong to the venture capitalist. Investors in this category will also not invest at the early stages of the business but when they see potential or actual growth.
Investments by venture capitalists are considered high risk, but the potential for growth shown by the small business can easily offset the risk of a bad investment.
Difference Between Venture Capital and Angel Investing
Venture capital and angel investing have similarities in that they focus on small and growing businesses. There is also their preference for technology and science sectors because they tend to show considerable growth and provide more investment security. Moreover, both kinds of investment can earn a reasonable stake in the business, and options for conversion of debt to equity can be made available.
Regardless of these similarities, there are also notable differences that set them apart. This is why a comparison of angel investors and venture capitalists is indispensable before a business decision can be reached. Below are some aspects where their differences shine through.
Amount of Funding Available
An angel investor will typically invest hundreds of thousands of dollars because they are investing their own money. Venture capitalists, on the other hand, will invest millions of dollars because they have more access to a range of funds.
Types of Investors
As already stated, angel investors are wealthy individuals or groups of individuals with high net worths. Meanwhile, venture capitalists take on high-risk investments with funding from third parties.
Time of Investment
Angel investing is usually done at a more vulnerable point of the business, which is a higher risk. Businesses that have angel investors are generally in their early stages, before or right after operations commence. Conversely, venture capitalists prefer to invest in more established businesses that have higher chances of providing tangible returns. To be fair, this is not out of place, considering that the funds belong to third parties.
Level of Involvement
Regardless of the type of investor, there’s a desire to become involved in the activities of the business they invested in. The aim for both venture capitalists and angel investors is to have a firsthand idea of how their investment is being managed and the steps being taken to ensure their returns. Angel investors tend to become part owners and get involved in the day-to-day operations of the business. But, in some cases, they are satisfied with only providing financial support. Venture capitalists, on the flip side, prefer to get involved in the decision-making by being on the board of directors.
Due Diligence
Due diligence is one of the most important segments of any investment process for angel investors or venture capitalists. Angel investors will usually conduct basic due diligence checks because they own the investment sum and won’t be held accountable by third parties.
Venture capitalists are more prone to lawsuits in the event of reckless investments because of the fiduciary responsibility to their clients and other third-party institutions. For this reason, they are liberal with the resources that go into due diligence, preferring to ascertain in the preliminary stages that the investment doesn’t pose any risk.
Industries of Interest
As a rule of thumb, an angel investor will invest in an industry they are familiar with. This is either because they have made money in that industry, or understand the workings. Venture capitalists are more interested in industries they consider profitable.
Angel Investor Pros and Cons
Angel Investor Pros
Angel investors are more willing to take risks with their own money by investing in businesses that have just launched operations or are about to do so.
In most cases, angels only require a return on their investment at a future date of the anticipated growth of the business. This is more convenient than debt financing with a set payback date.
Mentorship opportunities may present themselves because angel investors are familiar with the industry they have invested in. As startups need all the guidance they can get, especially when navigating challenges, angel mentorship is valuable.
With angel investing, there is flexibility to convert the investment sum into equity in the business. This saves the business owner from having to repay bank loans when the business is going through a rough patch.
Angel Investor Cons
Since angels invest their own money, their funds may be insufficient. The consequence is that a business owner will need to bring several angel investors on board and potentially deal with a slower funding process.
Some angel investors may become difficult to work with when they insist on having a say in your business without having some level of ownership.
Venture Capitalist Pros and Cons
Venture Capitalist Pros
Venture capitalists can and will most likely leverage their connections and experience in the industry to market and promote your business. This is a win-win situation for both parties involved.
Just like angel investors, they may grow your company by sharing their industry knowledge and referring professionals to work for.
Venture capitalists can also convert their investment sum to equity in your business and eliminate the need to pay back funds at a set time.
They can provide more substantial amounts of money your business needs to grow.
Venture Capitalist Cons
As is the case with angel investing, venture capitalists tend to have a say in your business due to the significant investment they’ve made. Expectations may get too high and can only be remedied through a balanced decision-making process.
The likelihood of a buyout by venture capitalists is high. This may only be beneficial when you need the funds for a new business venture.
The Role of Private Equity
After the above comparison of angel investor and venture capitalist, a quick definition of private equity is important to address grey areas and possible similarities.
Private Equity Definition
Private equity refers to funds that are mainly interested in acquiring private companies not yet listed on the stock exchange. Private equity funds usually have high-net-worth or accredited individuals and firms coming together to pool capital towards investment. Entry into these funds is exclusive due to the large sums required. For example, the minimum entry requirement for some funds is $250,000. Once the required capital is raised, the fund is closed.
Angel vs. Private Equity
The key similarity between angel investors and private equity is that they have the same goal of investing in a business to get returns. They may do so because they believe in the potential the business possesses, wish to gain control of it, or to save it from failing.
On the other hand, the major difference between the two types of investors is that the angel is an individual who invests on a smaller scale, while a private equity investor usually does so on a larger scale. The intention of a private equity investor is also geared toward acquiring the entity to be invested in.
Venture Capitalist vs. Private Equity
The objective that both venture capitalist and private equity have is the same - to get returns. Private equity investors, however, are more interested in larger enterprises and companies that are well established. As discussed in this article, venture capitalists are open to investing in startups and businesses that show growth potential.
Moreover, venture capitalists are known to narrow their investment scope to tech and science-inclined companies, but this is not the case with private equity investors who prefer diverse portfolios. The sizes of their investments also differ, with private equity investments being higher.
Final Thoughts
Regardless of your preferred capital raising strategy, if you’re a business or startup owner, you should explore the benefits provided by venture capitalists vs. angel investors. Even though both classes of investors can help you grow your business, you need to weigh the pros and cons to determine which one is optimal for your company. The amount of capital required is also an important factor to be considered because the investment scopes of these classes differ.
No matter the class of investor you need to approach, be sure to conduct due diligence and prepare an impactful business plan that will increase your chances of securing the investment you need.
By Nikolina Cveticanin ·
December 20,2022
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