Substantial capital is required to keep a business operational, and obtaining funding for this purpose is not easy,especially if you are just getting started. This is why some people approach angel investors and venture capitalists for financial assistance to run their newly launched businesses.
It gets confusing to select between the two, but in this article, we have summed up all you need to know about them.Read further to learn about:
- Angel investor VS Venture capitalist: the differences
- How are venture capitalists and angel investors a like?
So, let’s start our venture capitalists and angel investors difference guide:
Angel Investor vs Venture Capitalist
Understanding the differences between venture capitalists and angel investors is essential if you are validating a startup idea, launching a new business or searching for investors for your existing empire. Only then can you make the best choice for the future of your company. Here are some of the main features that set these angel investors and venture capitalists apart:
The first main difference between venture capitalists and angel investors is the kind of money they use to invest in businesses.
An angel investor contributes a significant amount of their personal money to an early-stage firm. To be eligible to invest, they must have earned $200,000 annually during the previous two years, with a high probability that they will make similarly high profits in the near future. Most importantly, regardless of marital or tax filing status,they must have a total net worth of at least $1 million.
On the other hand, a venture capitalist is a person or business that finances startup businesses with a combination of funds from huge enterprises, pension funds, and investment firms. A committee is usually in charge of making investment decisions for the fund. These investors are referred to as limited partners. There are also general partners who collaborate closely with founders or business owners.
Usually, small company angel investors place a greater emphasis on supporting someone's business development than on making quick money. Their terms are therefore more reasonable than those of a venture capitalist.
Timing of Investment
The stage your business is in influences the decision of selecting whether you should go for a venture capitalist or angel investor.
Angel investors focus on early-stage (pre-seed funding round) enterprises, providing money for early market entry and late-stage technical development. Even if the firm hasn't yet established itself, they pick ventures they are interested in and can see become successful.
However, a venture investor prefers to invest in a company that can back up its claim to success with a proven track record of success and sustainability. The main goal of their investment is to assist already established businesses in developing and growing.
If you are just starting, an angel investor may be able to offer you enough funds to get you on track. If your business is established and you want to grow, you can consider pitching your business to a venture capitalist.
Difference in Investment Amounts
The amount of business capital each investor is willing to offer makes a significant difference between them.
Angel investors typically invest between$25,000 and $100,000 of their own money. The amount can be less or slightly more since they are investing on a personal basis. Sometimes, a group of angel investors can yield average funding of more than $750,000.
On the other hand, venture capitalists tend to put more money into businesses than angel investors. They typically invest in the millions because they are funded by a group of investor companies.
It's recommend to understand the difference between pre money vs post money.
Involvement in Decision Making or Business Methods
Angel investors contribute to early start-ups just to give financial support with little to zero involvement. They may provide advice on how to run your business, connect you with lawyers,accountants, and banks, and assist you in making decisions. Their level of association is limited by the company's preference and the angel's own preferences. They are not required to consult or make critical decisions. But sometimes they give recommendations, for example to use the Lean Startup Method.
However, venture capitalists will be more involved in your business decisions. Once venture capitalists are convinced and have invested, it is their responsibility to assist in the development of successful businesses, which is where they truly add value. They represent as a consulting board for CEOs and will significantly impact the company's strategic vision or improve the startup's business model. Their involvement is not to take over the company but to help it survive and thrive while making a tidy profit.
The return on investment venture capitalists and angel investors want largely differs. Over the life of the investment, venture capitalists expect a return of between 25% and 35% per year. Venture capitalists have a great deal of flexibility because these investments only make up such a small portion of institutional investors' portfolios.
On the other hand, an angel investor,also known as a private investor, seed investor, or angel funder, sets a higher rate of return since they are investing solely and are investing personal savings. It is very common for them to expect a 30-40% return on their money over the course of three to ten years.
How Are Venture Capitalists And Angel Investors Alike?
Angel investors and venture capitalists share several similarities as the two are the most common alternative sources of funding. Both are looking for companies with a huge potential to bring them a good return. Let's take a quick look at how they are similar:
- To get a good return on investment, both VCs and angel investors assume calculated risks when making investments (ROI).
- Angel and venture capitalist firms both cater to innovative startup businesses.
- Both venture capitalists and angel investors seek business equity and/or control over how your company operates. Because they have invested money in it, they want to ensure a high return.
- In order to increase their chances of picking good companies,investors like to invest in industries they are familiar with or the ones which have more space to thrive in the market. This is why they mostly prefer companies related to technology and science.
We also wrote an article about how investors make investment choices.
Venture Capitalists and Angel Investors Difference: The Bottom Line
Taking funding from the marketplace is a big responsibility, which is why the decision should be made after careful consideration.
To make the best decision, you must first compare the investment stages of angel investors and venture capitalists.Furthermore, you should consider whether your early-stage startup is capable of shouldering the burden of a well-established and reputable group of investors or whether it is more flexible toward a single source of investor. It is up to you to assess your financial needs and determine whether an angel investor or a venture capitalist is the best fit for you.