Difference between Angel Investors and Venture Capitalists

Angel Investment : Meaning, Working and Types

What are Venture Capitalists & How it Works?

Funding a startup is for all its glamour and excitement an absolutely nightmarish process. With various options for funding available, two of the prominent modes of funding that catch the attention are Angel Investors and Venture Capitalists. They are the key players who largely fund innovations in the market, yet they differ vastly in their investment style. An entrepreneur must understand the difference between both groups so that he is able to select the appropriate investor for his company and continue on the path to success.

Who is an Angel Investor?

Angel investors have several backgrounds, though the business sector is frequently where they first started. Typically, angel investors work in the following fields:

Professionals in the business world, including attorneys, physicians, accountants, and financial planners.
C-level corporate executives who have advanced via the ranks and are knowledgeable of what is required to manage a profitable firm.
Entrepreneurs and successful owners of small enterprises who have already started profitable businesses and can identify startups with promising futures.

Features of Angel Investor:

Early-Stage Investor: Angel investors are the fairy godmothers/godfathers of startups, providing crucial seed funding (often $25,000 to $100,000) to propel promising ideas in their early stages. They back the potential they see in passionate founders and innovative concepts.
Mentorship: Although angel investors are key for funding, they may or may not act as mentors. Their experience in respective industries and as entrepreneurs helps the young companies in the Startup ecosystem.
Investment Flexibility: Angel investors often have more flexible investment criteria compared to VCs. They might be more willing to consider ventures with high risks and unproven track records, placing a strong emphasis on the founding team’s capabilities and vision.
Diverse Portfolio: Angel investors typically maintain a diversified portfolio across various sectors, spreading their risk and supporting a broader range of innovative ideas. They may even form angel investor networks to pool resources and expertise for investment opportunities.

Who is a Venture Capitalist?

A venture capitalist (VC) is an investor in private equity who lends money to companies with strong development potential in exchange for a stake in the company. A venture capital investment could include backing startup projects or assisting small businesses that want to grow but lack access to equity markets.

Venture capital firms are organised as limited partnerships (LPs), with the partners investing in the VC fund. Investment choices are typically made by a committee. Once potential businesses have been discovered, the aggregated investor capital is committed to sponsor these companies in exchange for a significant equity interest.

Features of Venture Capitalist

Stage Focus: VCs are like stage managers, typically entering the scene in later stages (Series A and beyond) when a company has already demonstrated traction and growth potential. Their investments fuel significant scaling efforts.
High Investment: VCs manage pooled funds from institutions like pension funds and endowments. They invest large sums (typically $1 million to $100 million) in exchange for a substantial ownership stake (20-50%) in the company.
Guidance & Network: Beyond capital, VCs act as strategic advisors, leveraging their experience and connections to help portfolio companies navigate complex challenges and access valuable partnerships or resources.
Demanding Partners: VCs expect a high return on investment and actively monitor progress. They often have board representation and set clear milestones to ensure companies meet their aggressive growth targets.