Venture Capitalist vs. Angel Investor: A Comprehensive Guide for Startups
Choosing the right investor for your business can require knowing the differences between a venture capitalist vs. angel investor, and what they can offer.
Entrepreneurs can find a wide array of opportunities in the early stage of a business or an early-stage company. A business can get capital through several methods depending on its needs.
Startups may begin with investments from friends and family until they reach the point where they feel ready to seek outside funding. Then, they may turn to crowdfunding or borrowing money from the bank. However, a large percentage of startups seek financing from venture capitalists and angel investors to fund business growth.
Making the proper decisions for your business requires the knowledge of a venture capitalist vs. angel investor.
What Is a Venture Capitalist?
In brief, venture capitalists are institutions that have pooled an investment fund for companies with high growth potential. An investment can target a specific sector, geographic region or stage in a startup’s growth. Venture capitalists receive equity stakes in businesses in exchange for capital invested.
They generally seek out companies with star teams and a leading position in a market large enough for explosive growth. They prefer to invest in more established companies as they go through their growth stages before an IPO or SPAC merger.
What Is an Angel Investor?
An angel investor typically provides early-stage companies with large cash infusions from his or her personal funds. Most angel investors invest early on in a startup and help lead or guide the founder and team to find a fit between product and market. In return, the angel investor receives equity in the company.
Both angels and venture capitalists exchange capital for equity in the companies they invest in. An angel investor’s share of the business is usually between 10% and 30% in the first round, which is subject to dilution in later rounds. The opportunity to take such a large equity stake in a business is very appealing to many angel investors.
Many angel investors are accredited, though not all are. You can learn how to become an accredited investor here.
So, what are the pros and cons of a venture capitalist vs. angel investor? Let’s take a look…
Venture Capitalist vs. Angel Investor: Pros and Cons
Pros and Cons of an Angel Investor
- Compared with banks and venture capitalists, angel investors are more likely to take on a larger amount of risk. Since angel investors aren’t held to banks or institutions, they can invest as they please. In other words, angel investors may not have the same concerns regarding risk that venture capitalists think are important.
- In many cases, angel investors don’t require repayment if a startup fails, making them especially risky for the investor. Moreover, angel investors often invest alone, so the money is coming straight from their pockets.
- The business knowledge of angel investors is extensive. Many people who are wealthy enough to qualify as angel investors make their money through their own businesses. The business knowledge they have may benefit you if you launch a startup.
- Angel investors can acquire large stakes in a startup by investing in it. Their investment often gives them a large stake in the startup, which means the startup founder has less control over the business.
Pros and Cons of a Venture Capitalist
- Venture capitalists provide startup companies with large sums of money. Entrepreneurs looking for funding might benefit from venture capitalists if they need a substantial cash infusion to get started.
- There is not much risk to entrepreneurs when they work with venture capitalists. Venture capitalists, like angel investors, often require no repayment if the business fails.
- They are well connected and have ample knowledge. Venture capitalists have ample experience in new business operations. In addition, they have numerous contacts. This includes other investors, industry leaders and helpful third parties that they make use of.
- Entrepreneurs have less control over the management of their businesses. In many startups, venture capitalists will require a controlling interest, which effectively removes a startup founder’s role as a leader.
Now that we’ve gone over the pros and cons, what sets a venture capitalist vs. angel investor apart?
Venture Capitalist vs. Angel Investor: What Sets Them Apart?
There are several similarities between angel investors and venture capitalists. It’s common for angels and venture capitalists to finance innovative startup businesses. Moreover, both tend to fund companies in the technology and biotech fields. Despite these similarities, venture capitalists and angel investors differ in various ways…
Venture Capitalists Work in a Group, Angel Investors Work Alone
Angel investors generally invest their own money in high-potential companies in exchange for an equity stake. They are often rich, influential individuals who are willing to invest in a company’s future. On the other hand, venture capital firms consist of a group of experienced investors. The capital they will receive will come from individuals, corporations, pension funds and foundations.
Venture Capitalists and Angel Investors Invest Different Amounts
The average amount invested by angel investors is between $25,000 and $100,000, though they can invest more if they wish. Although angel investors are generally quick solutions, their limited funds makes it impossible for them to finance all of a business’s needs. However, a venture capitalist invests $7 million in a company on average.
A Venture Capitalist vs. Angel Investor Support a Startup Differently
Angel investors offer financial support more than anything. They may offer advice or connect the startup with influential connections, but they are not obligated to upon investing. Involvement in the company depends on the wishes of the angel as well as the company.
As soon as venture capitalists believe in a company and invest in it, they often support it in building a successful company, which is where they add real growth potential. As well as establishing the company’s strategic focus, a venture capitalist helps recruit key personnel. These experts act as sounding boards for CEOs and offer advice. Each of these strategies aims toward helping a company be more successful and make money.
Angel Investors Generally Invest in Early-Stage Companies
An angel investor specializes in early-stage investing, providing funding for early market entry and early technical development. It can make all the difference to get a company up and running when an angel investor provides start-up funds.
However, venture capitalists often require more of a track record before investing. Once a business concept is solid and market traction is evident, venture capital firms usually invest in a business later in its growth. The venture capital industry rarely backs startups in the early stages unless there are special circumstances, such as already successful founders. Venture capitalists tend to steer clear of early-stage risks, providing growth capital only for businesses with high potential for global growth and scalability.
Venture Capitalist vs. Angel Investor: Final Thoughts
Approaching a venture capitalist or angel investor can make the difference in a failed or successful startup. If you are just starting out, getting funding is by no means an easy task. To keep your dream of starting your own business alive, you need capital.
It’s critical for startups to prepare for investors, whether they are angel investors or venture capitalists. So, make sure to do your research on venture capitalists and angel investors before pitching to them. The right type of investor for a business depends on its type, needs and where it is in its lifecycle. Although there is no absolute right answer when it comes to a venture capitalist vs. angel investor, there is likely a right answer for each business at any given time.
Find investors who are most aligned with your business. When you pitch to potential investors, you should show them your business plan, financial statements, financial forecasts and market analysis. In addition, you will need to add the amount of capital you are seeking, the amount of money already invested in your business and how your business plans to use the funds.