If you’re a freshly minted entrepreneur looking for funding for your startup, the language used in the investment community can be incredibly daunting. Angel investors and venture capitalists, for example, operate with several distinct objectives in mind.
Put simply, angel investors are wealthy individuals who choose to invest their money in startups that interest them. Venture capitalists, however, are businesspeople who invest in startup ventures on behalf of risk capital companies.
Understanding the core differences in the way angel investors, like this individual, and venture capitalists work can help you make an informed choice about how you want to build and bankroll your business.
Here are four key differences.
Investment Size
One of the biggest differences between angel investors and venture capitalists is the size of the investment they are willing to make. As noted above, angel investors are individuals, not companies. This means their investment capabilities are typically lower. Forbes estimates that angel investments generally range between $25,00 and $100,000. However, some angels are willing to work together to negotiate a higher total investment where required (think Dragon’s Den or Shark Tank).
Conversely, venture capitalists have much deeper pockets. With access to extensive funds from a combination of individuals, banks, and other financial institutions, they can afford to invest a staggering average of $7 million in startups that pique their interest.
Investment Stage
Angel investors aren’t afraid to step in during the very early stages of your business’s development. In fact, they generally prefer it.
During these first steps in your startup journey, your initial capital amounts will often be lower and more in line with the angel investor’s financial limitations. Additionally, angel investors aren’t driven or limited by fiduciary duties towards stakeholders, allowing them the freedom to invest in innovative, higher risk ideas that haven’t yet been proven in the marketplace.
While angels often invest in promise (e.g., a fascinating product or a founding team that inspires them), venture capitalists invest in proof. Venture capitalists often wait until a startup is far enough along to have experienced significant growth and proven its business model works. It’s at this stage when a larger cash injection is usually required to take the company to the next level. Venture capitalists want to support businesses with proven scalability.
Involvement Level
Angel investors are often driven as much by passion as they are by money. They will generally invest in people and businesses that truly intrigue and captivate them. Inspired by your ideas, angel investors are highly involved in the startup process and in determining how you utilize the funding they’ve provided.
This hands-on involvement is ideal for budding entrepreneurs seeking guidance, as many angel investors have a wealth of industry experience to impart. They may also have a strong network to introduce you to, including other investors, potential clients, and even trusted manufacturers and suppliers.
While angel investors act as mentors and motivators, venture capitalists expect you to already have the knowledge, dedication and expertise required to succeed in your new business.
Though they are typically hands-off in terms of mentoring, venture capitalists often want more to do with the technical and operational decisions made by your business. These larger investors will expect clear communication around your business’s financial metrics and marketing strategies. They are not afraid to intervene if they feel their investment is at risk. When dealing with large investments that require more guidance, venture capitalists may even take on company board positions.
An advantage of venture capitalists is their robust networks. Due to their sheer size and experience with investments, venture capitalists generally already have trusted and established relationships with manufacturers, marketers, and distribution chains. These connections can help you get to market quicker and with lower costs.
Exit Strategies
When it comes to exit strategies, venture capitalists tend to have predefined expectations for how long they will hold your business in their portfolio (this is sometimes called an “investment horizon”). They expect significant returns on their investment and, if this does not occur within the anticipated time frame, they may push for acquisition of your startup by another company or facilitation of a merger with a similar business. In other cases, venture capitalists may simply sell their stake in your company at a loss to finalize the investment before further resources are lost.
On the other hand, angel investors typically have a greater degree of flexibility in terms of their investment horizons. Angels generally accept that new businesses can take several years to develop and offer maximum returns. With no other stakeholders to answer to, angels can easily spend a few years working with a business to meet key objectives and increase market traction to eventually secure a stronger exit opportunity. For example, an initial public offering or acquisition.
After examining the four key differences between venture capitalists and angel investors, you should now be fully equipped to make an informed decision about the best funding body for your startup.
Lynn Martelli is an editor at Readability. She received her MFA in Creative Writing from Antioch University and has worked as an editor for over 10 years. Lynn has edited a wide variety of books, including fiction, non-fiction, memoirs, and more. In her free time, Lynn enjoys reading, writing, and spending time with her family and friends.
