New entrepreneurs running their first startups are going to have a lot of questions about funding. One of the main things they need to know is the difference between angel investors and venture capitalists. Both types of investment have a lot to offer new companies, but they will be utilized at different times and will expect slightly different things from you so knowing the difference between them and what they can do for you is important to understand if you want to succeed. Let’s explore the difference between angel investments and venture capital!
Who Are They?
Angel Investors – These investors are high net worth individuals. Their net worth excluding their home is at least one million dollars and they have an income of at least 200,000 dollars a year, 300,000 dollars if they are a couple.
Venture Capitalists – They are typically formed as groups called Limited Partnerships where Limited Partners invest in a venture capital fund. The fund manager is sometimes referred to as the General Partner. Their job is to find good investments and invest in the ideas and companies that they think will bring the partnership the most money.
Size of Investment
Most angel investors will invest between 25 and 100 thousand of their own dollars. There obviously are investments that are less than 25 or greater than 100 thousand but these are the averages. Recently, there have been more angel syndicates that aim to group a bunch of angel investors together in order to achieve funding more quickly for a startup.
Venture capitalists on average invest 7 million dollars into the businesses that they choose to get behind.
Stage of Investment
Angels are going to invest before venture capitalists, but they will most likely not be investing in just an idea. Entrepreneurs generally start with friends and family for the earliest stages of investment. Angels will typically invest during the last stage of technical development or early market entry.
Venture capitalists tend to invest later in the game. Generally, they do this during “Series A” investments to take a company through rapid growth and to quickly develop a market share. Venture capitalists help the company grow until such a time when the company is ready to go public or be acquired.
So now that we have explored the differences between the timing of investment, amount of investment, and financial size of angel investors and venture capitalists, what can you expect to have to pay them for their investment?
Since angels are investing in a company at an earlier stage they are taking on more risk than venture capitalists. However, despite this, angels and venture capitalists look for the same returns on their investments and that is generally 10 times the original amount over a five-year period. The reason both of these investors look for such high returns is that nearly half of their investments will fail. There is a lot of risk for them so the reward is going to be high.
How do They Decide Whether to Invest or Not?
Since angels are not beholden to anyone except perhaps their spouses, they tend to make their decision whether to invest or not on their own. It may only take one meeting and a handshake to convince an angel to invest.
Venture capitalists on the other hand have a fiduciary responsibility to their partners so they may spend upwards of 50,000 dollars to fully research the company and the people involved before a committee decides whether or not they will invest in the company.
Both angel and venture capitalist investments can do wonders for a young company trying to get a product before the eyes of the public and gain market share, but it is important to know who is behind the investment, when they will likely make an investment, and what they will expect in return.