Business Investment: Venture Capital VS Angel Investing

Published: 2021-06-05
Views: 455
Author: Editorial
Published in: Investment

Angel investors – sometimes known as angel funders, private investors, or seed investors – are high net-worth individuals who provide financial backing to entrepreneurs, small businesses, or startups. 

Venture capitalists are veteran investors and maybe anyone from wealthy investors to investment banks or companies.

Who is an Angel Investor?

Angel investors are individuals who invest in start-up businesses; normally in the early stages. This tends to be on Seed rounds of financing and also Series A rounds. Super Angels are those that invest checks north of $500K on Series A and up.

Individuals can also be micro investors. Micro investors invest in smaller amounts with some platforms allowing investors to start with just a few dollars.

In certain cases, business owners secure financing from family and friends. These family and friends may take on the label of "angel investor" even if they are not accredited investors themselves.

What is a Venture Capital (VC)?

Venture capital is finance provided by venture capitalists to a company they deem to have high growth potential or a high future earning prospect.

They generally provide startup and late-stage growth finance to smaller companies. The capital is not always monetary in nature, it can also be provided in the form of expertise or networking by the venture capitalists.

How does Venture Capital work?

A venture capital firm is usually run by a handful of partners who have raised a large sum of money from a group of limited partners (LPs) to invest on their behalf.

The LPs are typically large institutions, like a State Teachers Retirement System or a university who are using the services of the VC to help generate big returns on their money.

The partners have a window of 7 to 10 years with which to make investments, and more importantly, generate a big return. Creating a big return in such a short span of time means that VCs must invest in deals that have a giant outcome.

Key differences between Angel Investment and VC investment

Amounts invested

Angel investors will put in a variety of amounts, but as it’s generally seed funding you’re not looking at the kind of figures that VC investment deals with.

As a general rule, groups of angel investors might go as high as £1 million – but VC firms are unlikely to invest less than £1 million. Because so much time and effort go into brokering a VC deal, it needs to be worth the company’s while.

While the concept of too much funding might seem ridiculous to cash-strapped startups, with great funding comes great expectations, which is a lot of pressure to put on a fledgling business.

You have obligations to your investors, and the overvaluation of your startup can have serious consequences down the line.

Who they invest in

Angel investors specialize in early-stage businesses, while VC firms are generally more unwilling to invest in startups unless they show really compelling promise and growth potential (though this is changing as the startup scene continues to flourish).

While incredibly exciting startups in key industries might be able to win VC funding with a little track record, most businesses will have to demonstrate that they can walk the walk, not just talk the talk.

Involvement

Angel investors might have valuable advice for you, but ultimately they can be as hands-on or hands-off as you want. They will have equity in your business but will not have a seat on your board – unlike with VC investment.

Agreeing to VC investment means committing to bringing more people into how your business, people who have a say in how it’s run and whose job it is to help your business reach its potential.

While this can be a huge positive, if you’re at an early stage it might be overkill, and you might not have the flexibility to pivot or change the focus – too many cooks can spoil the broth, so to speak.

Timescales

VC firms need to evaluate their involvement with you – due diligence, research, and all the other aspects that help them decide if investing in you is a smart business decision that will see them reap a big return.

This all takes time. On the other hand, angel investors can make quick decisions, as they’re often working alone or have a personal interest in the business.

Motivations

The job of VC firms is to find the best businesses, help them, and then make a lot of money.

For angel investors, their motivations might be different – to help less experienced businesses within their sector, for example (though making a return on investment is also a factor, of course!)

Size of investment

Venture Capital will be able to fund much larger opportunities. Starting around $2M up to many tens of millions.

Business Angels will be looking at much smaller investments between $10k & $50k typically, however larger amounts are available when Angels band together in a syndicate to invest.

Risk

Venture Capital funds are custodians of other people’s money and will only look at well-proven projects that have already developed some traction within their marketplace.

Business Angels are investing their own money and so can decide to take some greater risk if they choose to do so.

Stage of business

Given the risk profile of both, Venture Capital organizations will not be investing in raw start-ups. They will be looking to enter at the point that a company is looking for funds to expand.

Start-ups and very early-stage businesses must look to Business Angels for funding.

Reference:

Virgin StartUp