Angel Investor Versus Venture Capitalist – Why You Might Fail With The Latter
Know the difference between an angel investor verses venture capitalist is extremely important. Many people believe that financing their start-up is all about gaining big investments and winning millions as soon as the business is established. But in fact, investment comes in all shapes and sizes. If you are looking to get your company off the ground, the kind of investment options that you might be considering include-angel or venture capital investment.
Both an angel investor and a venture capitalist will hold private equity from having made investments directly into private companies.
Despite having similar roles, there are some big differences between these two types of investors. Understanding them will play a big part in shaping your financing strategy.
Here is everything you need to know about the Angel Investor versus Venture Capitalist:
The Angel Investor
An Angel Investor has been proven to be a significant source of funding for many business startups. According to research, an estimated $850m per annum is invested by angels annually in the United States. Simply put, an angel investor invests their personal finance into growing a small business that is still in its early stages.
This could be a financially stable individual who is looking for investment opportunities, someone who is part of a group of investors who come together to finance startups or a friend who made a decision to put their money into supporting your business. This investor also contributes their advice and business experience into running the business. However, they are not responsible for building up your business.
An angel investor makes a decision on the amount of investment. In return for providing this personal equity, the investor is rewarded by shares in the business. There is no fixed amount that the angel investor can put into a business; it could be a minimal amount to get your startup off the ground or a bigger amount that will sustain the business.
The Venture Capitalist
In comparison to an angel investor, a venture capitalist does not work alone. This is a professional investor who works with an entire firm inclusive of board members, investors and other individuals who are interested in making your business grow. When it comes to the Angel Investor versus Venture Capitalist, the latter’s funds come from various sources such as corporations, foundations, pensions or even individuals.
A venture capitalist is often referred to as a ‘limited partner’. He or she simply works to ensure that the startup is developing successfully. However, a venture capitalist only works with a business that has a higher growth potential. For getting involved in your business, this professional expects a solid return on investment.
After a certain time period, maybe a few years, the venture capitalist often sells the shares in your business back to you. This can also be done through an initial public offering that will enable them to make much more money than they invested.
The Key Differences Between Angel Investor verses Venture Capitalist
There are several main differences that relate to the Angel Investor Versus Venture Capitalist. These differences include:
As already discussed, an angel investor will put in any amount of money in your business startup. This is generally considered seed funding and nowhere close to the amount of money that a venture capitalist may offer.
If you are working with an angel investor who is part of an angel investment club, you may receive an investment of $1 million. However, as a general rule, a venture capitalist is not likely to invest less than $1 million in your startup. This is because a lot of effort goes into brokering a venture capitalist deal.
Remember, a lot of upfront funding for your business comes with great expectation. This may put unnecessary pressure on your fledgling business. In addition to this, the overvaluation of your business may have consequences in future.
An angel investor will always have valuable business insight but they can choose to be involved in the business only if they wish to. This investor will also have shares in your business but unlike a venture capitalist, will not have a seat on your board of directors.
A venture capitalist’s investment brings more people into your business and decides on how things are run. As such, your business will be able to achieve its potential. This is highly positive but if as a newly-launched business, you may not be capable of pivoting changes in your own business when too many hands are on board.
The Stage of Investment
An angel investor will invest in a business much earlier than a venture capitalist. However, angel investment is not just about financing an idea. Therefore, as an entrepreneur, you will have to have a prototype or beta version of your products and an angel investor will provide funding when you are ready for market entry.
A venture capitalist will then come in with a ‘series A’ investment that will take the business through rapid growth. As such, this investor will help the company grow until it is ready to go public or be acquired.
When it comes to an Angel Investor versus Venture Capitalist, the latter will need to determine whether they really want to be involved with you. They will carry out proper research to assist them in deciding whether investing in your business is the best decision for them.
After all, a venture capitalist wants to reap big benefits from your business. In comparison to this, an angel investor is personally interested in the business. This is because they often work alone.
An angel investor makes their own decision and is not beholden to anyone. However, the main difference between an Angel Investor versus Venture Capitalist is that a venture capitalist work together with a committee to make decisions so that they remain as objective as possible.
Hope the above explains the main difference between an angel investor vs venture capitalist. Choose the best type of investment to help your company off the ground.
Always remember that nobody cares about your company as much as you do. Therefore, to ensure that you get the best start, raise sufficient capital and only ask for an investment when you need to. An angel investor will always ensure that your business gets ahead without too many conditions.
On the other hand, wait as much as you can before getting a venture capitalist into your deal. If you can, continue building without this investment. But if you really need the financing, ensure you have the right employment agreements in place. Also, understand the repercussions of giving up significant control of your business.
Have a look at our investors list. It includes many angel investors and venture capitalists. You can view the data that we’ve collected for free.