Key Differences Between Angel Investors and Venture Capitalists Key Differences Between Angel Investors and Venture Capitalists
Startups rely on a variety of sources for fundraising, and two of the more common sources of funding for businesses are venture capital and angel investment. Both venture capital firms and angel investors invest in startups in exchange for equity in the company. Most startups use both angel investors and venture capital to achieve their growth goals.
Key Takeaways:
- Most startups use both angel investors and venture capital investors at different points in their growth journeys.
- Angel investors are individual investors who invest their own money usually in early-stage startups in return for equity.
- Venture capital firms typically invest in more established startups in return for equity.
- Angel investors don’t take as active an approach in the management of a business as VC investors do.
- Both angel investors and VCs can help startup founders network and provide important mentorship.
- There are also groups of angels that get together and forms syndicates.
So what's the difference between the two? It's an important distinction to make for startup founders looking to take advantage of one or both in helping secure necessary funding for their business. Below, we'll dive into the crucial differences between angel investors and VCs.
What Is an Angel Investor?
An angel investor is an accredited investor who invests their own money in a startup in exchange for equity. There are angel investor networks comprised of multiple investors who pool their money to make investments, but most angel investors operate alone.
Angel investors usually tend to focus on early-stage companies and will invest smaller amounts of money than venture capital investors. As they are getting financially involved in mostly early-stage businesses, angel investors may require less proof of concept and do less due diligence than a VC investor would. They also generally do not take on a hands-on role in running the business in exchange for their funding.
However, angel investing is more than just an important way for startups to raise money in their early stages. Angel investors are more often than not successful, savvy businesspeople who can serve as mentors for startup founders. In addition to providing capital investments to help a startup achieve important growth goals, angels can serve as human capital for startups as well by helping founders network with other potential investors, sharing business advice, and more.
What is a Venture Capitalist or Venture Capital Investment Firm?
Startups receive venture capital funding from VC firms, which is an investment group comprised of individual investors known as Limited Partners. The fund manager or General Partner uses a combined pool of the Limited Partners funds to invest in startups for a return of equity ownership.
So far this sounds pretty similar to angel investing, right? Where venture capitalists and angel investors differ is the stage of startup they tend to invest in. While angel investors tend to come on board as investors earlier on in the startup journey, VCs typically look for more established startups to invest in. Venture capital investors usually want to see a more flushed out proof of concept, strong business plan, established customer base, and a solid strategy for turning a profit over the long-term. As such, VC investors also tend to do significantly more due diligence and internal analysis into a startup before deciding to invest.
While VCs are generally more risk-averse than angel investors, they tend to invest significantly more than angel investors do. Because they are investing at later stages than angel investors when a company is valued higher, they understandably have to pay more for their equity stake. With this larger investment size, VCs usually want to be more actively involved in the management and direction of a startup.
What Are the Key Differences Between Angel Investors and Venture Capitalists?
While both angel investment and venture capital are important funding sources for startups, there are some important differences as we've outlined above. Let's recap:
Angel Investors
- Invest in early-stage startups in return for equity
- Generally invest smaller amounts
- Angel investors don't take an active role in the direction of the business
- Can provide important mentorship to founders and networking opportunities to other potential investors
Venture Capitalists
- Invest in more established startups with a developed business plan and customer base
- Venture capitalists typically make larger investments
- Venture capitalists may take a more active role in the management and direction of the business
- VCs will help a startup's leadership team network and connect with industry experts
If you have any questions about the right type of funding for your startup, or if you need assistance meeting your business's banking needs don't hesitate to reach out to Leader Bank's Startup Banking team!
Consider adding the point that angel investors usually invest in new companies that could create meaningful change in an industry or issue they believe strongly in. For example, an angel investor who built a thriving retail company may invest mainly in new retail disrupters, an angel who's family member is blind may invest mainly in technologies that are potentially game-changing for people with diminished sight or hearing, or female angels may be interested in supporting women-owned businesses. You might also add the point that angels' investments are often paid off when a VC comes in later with more significant funding for greater equity and control.
