What Is the Difference Between Angel Investors and Venture Capitalists?
Entrepreneurs who want to move their ideas from their heads to the market usually need some help in the funding department. Unfortunately, although loans and grants are certainly out there, they often aren't available to startups, as these companies either don't meet stringent requirements or are seen as too much of a risk.
Angel investors and venture capitalists, therefore, end up getting a huge number of enterprises on their feet.
These two kinds of investors are not the same. To make sure your business gets what it needs, you need to recognize their differences.
Ownership of Money Invested
Angel investors take their own money and put it toward the companies they are interested in. Their personal financial investment, coupled with their sincere desire to contribute to a new business and share their expertise, translates to high commitment, especially in the first years of operation. By contrast, venture capitalists take funds from other individuals or organizations and pool the money together. They then invest the money in businesses on behalf of those people or groups. Although the money they work with is not theirs, they are driven to invest wisely because they have a fiduciary duty to those they represent.
Amount of Funds
In general, the amount of money you will get from an angel investor is much lower than what you would get through a venture capitalist. Most angels invest $250,000 or less. In fact, it is becoming increasingly common for individuals to invest as little as $5,000, both because of relaxation of regulations and technology-driven ease of access to entrepreneurs. Venture capitalists usually invest at least $1,000,000 to $2,000,000. Angel investors often pool their funds in order to pick up the slack between individual angel and venture capitalist contributions.
Typically, angel investors get involved with entrepreneurs and their companies very early on. They routinely connect with startups once the entrepreneurs have thoroughly studied the market and are ready to present their business plans, although they sometimes look for investment opportunities with small businesses that need some help in the early stages of growth. Venture capitalists, because they have more funds available, usually look for entrepreneurs whose businesses already have some good footing.
Angel investors typically have some experience in the fields in which they end up investing. This enables them to take a unique position as advisors to the business if they so choose. Venture capitalists may have no familiarity with the industry they're supporting, but they usually have a strong background in business or finance that allows them to handle the investments very responsibly. They sit on boards for the businesses they assist, but only to ensure that the money they are investing for others is protected.
Angel investors are using their own money, so they have far fewer legalities to contend with than venture capitalists do. Venture capitalists typically have access to legal advisors or attorneys as a matter of standard because of their additional liability risks. Their proceedings often take longer, as well, as they must go through the core investors, attorneys and board members before making a move.
In some instances, the line between angel investing and venture capitalism can be somewhat blurred. There are cases, for example, when venture capitalists make decisions very fast, work with relatively small amounts of money or don't sit on a board, as explained by Ben Horowitz of Business Insider. It all really depends on what the entrepreneur needs and what the angel or venture capitalist is comfortable doing.
Angel investors and venture capitalists both support growing businesses. They do so, however, in very different ways. The general rule is that you use an angel investor when you are in the initial stages of development, don't mind having someone as an advisor and aren't looking to get a huge sum. You use a venture capitalist when you are already established but need a boost to move forward, don't mind additional complexity to your proceedings and need a decently sized amount of money. Despite the widely accepted distinctions between these two types of individuals, you might have cases where a venture capitalist acts as an angel or vice versa.
Angel Capital Association (2014). FAQs on Angel Investing.
Horowitz, B. (2010). How Angel Investing Is Different Than Venture Capital.
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Basic but good read. What we see in the Dutch startup market is the following, more or less in line with this article:
- Angel investors indeed more and more acting as a sort of informal fund, though still with less complex structures, faster from first meeting up to closing. What still lacks though is angels and founders taking time to see what the angel can really add to the business besides the money being invested.
- Angel investors are more and more using (small) convertible notes, on average around 50 k per note.
- (Smaller) VC's dropping the bottom amount they will step in and act more (but still not enough looking at the (early) stage the company is in) actively early stage.
The point being, it can't be said enough: both investors and founders should spend more time on exchanging views on the business, its opportunities, markets to expand early stage, revenue models, etc, to test whether the fit is more than investing as such.