Angel Investors vs. Venture Capitalist: A comparison
Startup financing refers to the primary introduction of funds, through various sources of finance, to convert the idea into a product or service by commencing the business.
Angel investors and venture capital are the two major alternatives to startup financing. Angel investors are wealthy individuals who provide young entrepreneurs and startups with financial backing in the early stages. On the contrary, a venture capitalist is a firm, composed of a team of financial experts or a professional person, that derives their investments from annuity funds, insurance companies, provident funds, high net worth individuals, etc. to invest in startup firms and small businesses. The difference between an angel investor and a venture capitalist is discussed here below. Take a look.
Comparison Chart
BASIS FOR COMPARISON | ANGEL INVESTOR | VENTURE CAPITALIST |
Meaning | Angel investors are affluent individuals who help startup founders start their business by investing their money in exchange for an ownership stake or convertible debt. | A venture capitalist refers to an organization or a part of an organization or a professional person who invests in budding companies by providing them with capital to help them grow and expand. |
What is it? | Individual investors, who are often successful businessmen. | Professionally managed public or private firm. |
Investment | An investment is made in the pre-revenue business. | An investment is made in the pre-profitability business. |
Money | Use their own money to make an investment. | Pools money from insurance companies, funds, foundations, and corporations to make an investment. |
Investment size | Less | Comparatively large |
Screening | Undertaken by the angel investor according to their own experience. | Undertaken by a team of experts or by an outside firm that specializes in the same. |
Post Investment role | Active | Strategic |
Stresses on | Investment criteria related to ex-post involvement. | Investment criteria related to the initial screening of investment opportunities. |
Approach to agency risk control | Incomplete contracts approach | Principal-agent approach |
Definition of Angel Investors
Angel Investors, or otherwise called Business Angels, Seed Investors, or Informal Investors, are individuals with high net worth who often provide funds to budding companies or young entrepreneurs in their early stages.
Angel investors have excess cash that they want to invest in companies that can provide them with higher returns than they would otherwise receive. And for this goal, they invest in companies in exchange for a fair ownership share after determining the idea’s development potential and returns on investment.
The financial support might be in the form of a single sum investment to assist new enterprises in establishing themselves effectively, or it can be a continuous infusion of cash to assist the firm in passing through the first phases quickly. Angel investors provide capital in three ways: company loans, convertible preferred stock, and common stock.
When it comes to contract terms and conditions, they are also favorable, as their investment is in the entrepreneur starting the firm rather than the idea or the business’s success potential.
Some business angels actively participate in the enterprises in which they invest their money, while others just offer funds. A high number of angel investors provide funds to firms through crowdsourcing.
The Definition of Venture Capitalists
A venture capitalist is a member of a large organization or a professional person who uses funds from third parties to invest in a new or rapidly growing venture, often by infusing risky capital into the firm, called venture capital.
- The third parties are investors in venture capital firms such as banks, financial institutions, insurance companies, pension funds, corporations and high net worth individuals. It is like funding startup firms or small businesses, who cannot raise funds from the financial market.
- The startup company is promoted by young and qualified entrepreneurs, who do not have sufficient funds to turn their innovative ideas into reality.
Venture capitalists give long-term financing as well as assistance to businesses in business networking, product development, managerial experience, sales strategy, advertising strategy, and so on. Venture capital funding might take the form of an equity investment, a participating debenture, an income notes, or a conditional loan. The investment in venture capital funding is made for a lengthy period of time, usually three years or more. Typically, they purchase equity shares in a firm in order to participate in its management and aid in its early phases.
Differences between angel investors and venture capitalists
Angel investors and venture capitalists share some characteristics as two of the most popular alternative sources of finance. Angel and venture capitalist firms both cater to innovative startup enterprises, with a preference for companies connected to technology and science. Having said that, there are some significant distinctions between venture capitalists and investors.
1. An angel investor works alone, while venture capitalists are part of a company.
Angel investors, sometimes known as business angels, are individuals who invest their finances in a startup. Angels are rich, often influential individuals who choose to invest in high-potential companies in exchange for an equity stake. Given that they are investing their own money and there is always an inherent risk, it’s highly unlikely that an angel will invest in a business owner who isn’t willing to give away a part of their company.
Venture capital firms, on the other hand, comprise a group of professional investors. Their capital will come from individuals, corporations, pension funds, and foundations. These investors are known as limited partners. General partners, on the other hand, are those who work closely with founders or entrepreneurs; they are responsible for managing the fund and ensuring the company is developing in a healthy way.
- They invest different amounts.
If you’re looking into the possibility of approaching a venture capitalist or an angel investor, you’ll need to have an accurate idea of what they’ll be able to provide financially. Typically, angels invest between $25,000 and $100,000 of their own money, though sometimes they invest in them. When angels come together in a group, they might average more than $750,000.
While angel investing is a generally quick solution, you should note that, because of their relatively limited financial capacity, angel investors can’t always finance the full capital requirements of a business. Venture capitalists, on the other hand, invest an average of $7 million in a company. - They have different responsibilities and motivations.
Angel investors are primarily there to offer financial support. While they might provide advice if you ask for it, or introduce you to important contacts, they are not obliged to do so. Their level of involvement depends on the wishes of the company and the angel’s own inclinations.
A venture capitalist looks for a strong product or service that holds a strong competitive advantage, a talented management team, and a wide potential market. Once venture capitalists are convinced and have invested, it is then their role to help build successful companies, which is where they add real value. Among other areas, a venture capitalist will help when it comes to establishing a company’s strategic focus and recruiting senior management. They will be on hand to advise and act as a sounding board for CEOs. This is all with the aim of helping a company make more money and become more successful.
Angel investors only invest in early-stage companies.
Angel investors specialize in early-stage businesses, funding their late-stage technical development and early market entry. The funds an angel investor provides can make all the difference when it comes to getting a company up and running.
Venture capitalists, on the other hand, invest in early-stage companies as well as more developed companies, depending on the focus of the venture capital firm. A venture capitalist will be keen to invest if a startup shows compelling promise and a lot of growth potential.
A venture capitalist will also be eager to invest in a business with a proven track record that can demonstrate it has what it takes to succeed. The venture capitalist then offers funding to allow for rapid development and growth.
They differ in due diligence.
Due diligence has been a source of contention for angel investors for many years. Some angels perform practically no due diligence – and they aren’t actually required to, considering that they possess all of the money. However, it has been demonstrated that angel investors who conduct at least 20 hours of due diligence are five times more likely to receive a favorable return.
Given their fiduciary obligations to their limited partners, venture capitalists must conduct greater due diligence. When it comes to analyzing investment opportunities, venture capitalists might spend more than $50,000.
Angel investors are former entrepreneurs who provide their own money to the new entrants in order to establish them successfully. On the other hand, venture capitalists look for an influencer idea, a strong product, and an effective business model that possesses an exceptional competitive advantage and a qualified entrepreneur. Both angel investors and venture capitalists aim to provide funds to entrepreneurs or small businesses with an innovative idea and the viability of the business. Furthermore, they are more inclined towards ideas relating to science and technology.