Angel Investment vs Venture Capital: How does it differ?

A brief intro:

Angel investment vs venture capital

Securing funds for your business is no cakewalk, especially when you are kick-starting your business. Every start-up needs access to capital, whether it’s to finance product development, acquire machinery and inventory, or pay its employee salaries. Depending on what stage your company is in, you might be seeking investment from a venture capitalist (VC) or an angel investor.

Both venture capitalists and angel investors are those who put money into companies and are, in fact, the most common alternative sources of funding. While investing, they take calculated risks in the expectation of a positive return on investment (ROI).

To help seek funds from the best fit for you, whether VCs or angel investors, it is imperative to know the differences between the two and what each party can offer you.

Angel investment vs venture capital: Key points

1. Basic meaning

Angel investors, also referred to as business angels, are individuals who contribute their ‘personal finances’ to a start-up. Angels are affluent, often prominent people who want to invest in high-potential businesses in exchange for equity.

A venture capital firm, on the other hand, is an investment firm, usually at the center stage, pooling money from high net worth individuals or big businesses desirous of investing their capital in new ventures. Formation of venture capital funds can take the form of trust, a company, or a limited liability partnership. Venture capital firms extend equity capital to promising ventures of privately held companies for returns that are higher than market interest rates.

2. What money they use to invest

The major difference lies in the source of investment. While venture capitalists invest using the money derived from other investors, angel investment is funded out of investors’ own money.

Angel investors usually use their own money, as opposed to the venture capitalists who take control of pooled funds from many other investors and put it into a strategically managed fund. VCs pool money from investment companies, financial institutions, banks, HNIs, large corporations, foundations, and pension funds.

3. When do they invest?

Angel investment and venture capital vary in terms of the stage of the start-up at which they are sought. While angel investment takes place at the early stages of a start-up, venture capital firms invest later.

To reduce their chance of losing investment, venture capitalists tend to invest in companies that are already structured and looking to expand.

On the flip side, angel investors are most likely to invest in businesses that are just heading out. They select businesses that they are interested in and can see being competitive, even though the business has not yet proven itself to be successful. This is why angel investors take more risks than venture capitalists.

4. Amount of investment

Another distinctive parameter between angel investors and venture capitalists is the quantum of business capital they are willing to offer. Venture capitalists, invariably, invest millions of dollars in new start-ups. But angel investors are seen investing only up to $1 million into a project at most times.

VCs commit more capital in companies than angel investors do. While venture capital tends to be invested in millions, angel investments are seen to be in thousands.

5. Expected return

Normally, venture capitalists require a higher percentage of return (between 25 to 35%) in comparison to angel investors who expect a 20 to 25% return.

Unlike venture capitalists, many angels are not purely profit-driven. Particularly if your angel is a current or former entrepreneur, he or she may be motivated as much by the enjoyment of helping a young business to succeed as by the money that he or she can earn. (Source)

6. What do they look for?

In general, venture capitalists may invest in companies that they believe have the potential to make them money, while angel investors typically make investments in businesses that operate in industries with which they are personally acquainted.

Unlike venture capitalists, who quickly require aggressive revenue growth, angels are more concerned with the engagement and enthusiasm of the founders and the broader business opportunities they have established.

7. Role in business

Both angel investors and venture capitalists need equity stake and/or some sort of control in how your business runs.

Venture capitalists can require you to set up a Board of Directors and give them a seat on it after having invested. This is why they take an active part and have a say in your business, be it recruiting senior management or advising the top management in their strategic decisions. However, they are usually not involved in serving as mentors, although this varies from firm to firm.

A lot of angel investors serve as mentors. They may advise on how to run your company, help you make contacts with lawyers, accountants, and banks, and help you make decisions. (Source)

8. Length of investment

Venture capitalists tend to invest much longer than angel investors. Angels are usually invested for a period of two to five years before the exit of the investment. On the other hand, venture capitalists typically remain involved for at least ten years before they quit.

Takeaway

The table below summarizes the key points underlining “Angel investment vs Venture capital” in nutshell:

Angel investmentVenture capital
– An individual
– Invest their own money
– Not involved with company and its Board
– Seed and early stage
– Entrepreneurial behavior
– A company
– Invest the money of others
– Want involvement in the company
– Expect high return
– Commit huge capital
– Early and later stage
– Act as financial managers

Hope the information provided in this article proves helpful to you!


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