As a start-up or an early-stage business, the all-important decision of ‘who can we approach to finance us?’ can come down to either an angel investor or a venture capitalist. You need to know the differences between angel investors and venture capitalists. Though they’re often mentioned in the same breath, they are essentially two different and distinct financing solutions. Here’s a comparison between the two.
An angel investor versus a venture capitalist: What does each look like?
Angel investors are most often high net-worth individuals or couples who invest their own money in businesses. Venture capitalists are structured where an investment pool contributed by multiple/several investors is available to businesses.
Does that mean venture capitalists can afford to be more generous?
Absolutely. Angel investors – at the most – will be willing to lend you up to $1,000,000. Some may come together as angel groups and increase financing capacity but rarely in the millions. That’s what venture capitalists do, investing an average of $7 million. The United States has a thriving venture capitalist ecosystem that deploys billions every financial quarter to support high-potential businesses. According to the Ewing Marion Kauffman Foundation, there are around 300,000 angels and 400 active angel groups in the country.
Who are angel investors and venture capitalists more likely to fund?
Angel investors lead investments in start-ups or early-stage ventures in return for an equity ownership interest. They may assist with product development and market entry. Venture capitalists are more interested in helping companies expand and grow through an initial Series A funding. Subsequent series may involve larger amounts to prepare companies to go public or be acquired or merged.
How do they approach proposals and contribute to the business?
Angel investors are not very stringent with due diligence, and rally around the founder’s vision. You may meet with an angel investor over lunch/dinner, and he/she may assess you during those interactions. Angel groups may conduct deeper research, but venture capitalists invest in strict due diligence, which may consist of an initial screening followed by a business and legal due diligence.
As far as their involvement is concerned, angels don’t intervene in or control the business directly, though a representative from an angel group will sit on the company’s board and continue in this position even after investment by a venture capitalist. Venture capitalists get board seats, have a say in future investments, and tend to set fixed deal structures and influence financial decisions.
What kind of expectations do they set for the business?
Angel investors have higher expectations as they’re taking substantial risk by investing in your business with their personal money. Venture capitalists, on the other hand, come in when the business is starting its growth journey and after considering the risk of failure. This usually means they don’t set a very high bar for return on investment.
If you have a great concept you’re trying to get from the drawing board to the marketplace, you can have all the ambition in the world, but you won’t get very far without funding. Do you need an angel investor or a venture capitalist? You can find out by contacting Activation Investments today.
Tags: Angel Funding, Angel Investors versus Venture Capitalists, Investing in Healthcare Companies
Categorised in: Angel Investor ServicesJanuary 24, 2017 3:41 pm