What Are The Differences Between An Angel Investor And Venture Capitalists
If you own a business that has a perspective of solid growth who should you be looking for? An angel investor or a venture capitalist? What about if you just launched a new startup on the market and are looking for investments right now? Who should you reach for?
Although these two might sound quite similar, they definitely have quite some differences between them. Let’s make it clearer by explaining points in which they differ the most.
1. Angel Investors Are Individuals, Venture Capitalists Are A Part Of A Group
Angel Investors are usually high net worth individuals and former successful entrepreneurs that look for businesses to invest in. They don’t only invest money to help the growth of the business, but they also look to share their experience and advise to improve the business they are investing in.
On the other hand, Venture Capitalists are professional investors that work with companies that pool funds from several individual and institutional investors.
2. What Businesses Are They Looking For?
Angel Investors mostly invest in pre-revenue business. If you have a great idea and are just launching a startup with the hopes you will be able to make your business grow and bring you revenue, you should be looking for an Angel Investor.
On the other hand, Venture Capitalists work in a different way. They look for pre-profitability businesses that are more developed and that have a proven track record of their growth. These businesses already have a solid revenue, but might multiply their growth and profit with a capitalist investment that will rapidly develop the business.
3. How Much Money Do Each Of Them Invest?
Angel Investment is usually limited to a few million dollars. On the other hand, Venture Capitalist Investments can range from few million to tens of million thanks to the amount of funds they have at disposal from their pooling of funds.
4. What Type Of Investment Do They Offer?
It is obvious that investments come at a certain cost, but what will an angel investor or a venture capitalist expect in return for their funds?
Usually, an angel investor will ask of the right to buy shares in future equity offerings through Equity and/or SAFE (simple agreement for future equity). On the other hand, venture capitalist will offer an investment through equity and/or convertible debt.
5. How Risky Is The Investment?
Angel investment is a highly risky one because of the stage in which the business is found at the moment of investing. These businesses are usually pre-revenue start ups that still don’t have a clear forecast of a solid growth and profitability.
Since Venture capitalists choose pre-profitability businesses in a later stage of development, this type of investment is comparatively less risky. The revenue stream is proven and functioning, but the profitability of the business isn’t still certain.
6. How Much Time Do They Need To Decide If They Will Invest In The Business Or Not?
As you could probably guess yourself, an angel investment takes shorter time because the decision making is due to a single individual (the investor). On the other hand, Venture Capitalists need longer time to make the decision because they have to consult several stakeholders and wait for their decisions based on different interests.
So, if you’re short on time (which you shouldn’t be, because patience is the key to success), you might lose some nerves if waiting for a venture capitalist to make the investment decision.
7. What’s The Rate Of The Return Potential From Each Investment?
Since here it’s all about the risks. The Angel Investor has a much higher return potential that can outgrow the initial investment by 100 times. Venture capital investments are set only after an analysis of the business and a calculation of potential risks, which is why the ongoing investment returns could be a lot lower than those of an Angel Investor.