To resolve the dilemma of venture capital vs angel investing when seeking financial support for their growth, it is important for the startups to know how these different types of investors are operating. Even though getting money from friends and family can be helpful, a startup may need more capital (funding) to get off the ground.
What is an angel investor?
Angel investors are usually wealthy people who put their own money into startups or companies in their early stages of development in exchange for a stake in the company. Angel investors may help the company with their business knowledge, but most of the time they are happy to get an equity stake in exchange for their money.
Often, these businesses don’t even have customers or make any money. They may only have a good business plan, a beta test, or the bare minimum product that will work. The money from angel investors is usually used for research and development (R&D) to help the company figure out what products and services to offer, how to run its business, and who its target market is.
Angel investors can be family members or friends who know about the funding opportunity or a group of angel investors who pool their money to look for investment opportunities.
What is a venture capitalist?
Venture capital funding is a way to invest that is more process-driven. Most of the time, VCs join the process of raising money after angel investors. One could say that angel investors “find” many of the investments that venture capitalists will want to take part in. Again, the payoff is a share of ownership in the company that gets the money.
When people or businesses want to get into venture capital funding, they usually set up a limited partnership (LP) firm. In this kind of partnership, the roles of the investors and the management are clear and, most of the time, kept separate. The people who put money into a VC firm are called “limited partners,” while the people who run the firm are called “general partners.” It’s important to know that these investors are “outside investors” and don’t work for the firm. Instead, they invest in the firm, which is similar to how a hedge fund works.
Most of the time, these limited partners are professional investors like pension funds, endowments, and wealthy accredited individuals. However, this is not a requirement. In addition to investors, the VC firm has a number of employees whose job it is to give the fund recipient’s business the help it needs to grow.
A VC firm’s managing partner doesn’t have to be an investor, but they often are. Their job is to invest the money in ways that will make money.
Venture capital vs angel investing: the main differences
Angel investors and venture capitalists are two of the most common alternative ways to get funding. They have a lot in common. Angel investors and venture capitalist firms both like to help new businesses get started, and they both tend to like businesses that are related to technology and science. Still, there are some important differences between investors and venture capitalists.
Venture capitalists are part of a company, but angel investors usually work alone
Angel investors, also called “business angels,” are people who put their own money into a new business. Angels are wealthy, often influential people who choose to invest in companies with a lot of potential in exchange for a piece of the company. Angels risk their own money when they invest, so it’s unlikely that they will invest in a business owner who isn’t willing to give up some of their company.
Venture capital firms, on the other hand, are made up of groups of professional investors. The money they need will come from people, businesses, pension funds, and foundations. This type of investor is called a “limited partner.” On the other hand, general partners are people who work closely with the company’s founders or entrepreneurs. It is their job to manage the fund and make sure the company is growing in a healthy way.
They put in different amounts of money
If you’re thinking about asking a venture capitalist or an angel investor for money, you’ll need a good idea of how much they can give you. Angels usually put between $25,000 and $100,000 of their own money into a business, but sometimes they put in more or less. When angels get together, they might be worth more than $750,000 on average.
Angel investing is usually a quick way to solve a problem, but you should keep in mind that angel investors don’t always have enough money to cover all of a business’s capital needs. On the other hand, in 2021, the median deal size for later-stage VC-backed startups was 14 million U.S. dollars, up from 9.9 million in 2020, according to Statista.
They have different motivations and responsibilities
Angel investors are mostly there to help with money. They don’t have to give you advice or put you in touch with important people, but they might if you ask. How much they help depends on what the company wants and what the angel investor wants to do.
A venture capitalist looks for a strong product or service that has a strong competitive advantage. Also, a talented management team, and a large potential market are very important. Once venture capitalists are convinced and have put money in, it is their job to help build successful companies. This is where they really add value. A venture capitalist can help a company, among other things, figure out what its strategic focus is and hire senior management. They will be there to give CEOs advice and let them talk things over. All of this is done to help a business make more money and be more successful.
Business angels only invest in early-stage companies
Angel investors focus on early-stage businesses and help pay for the final stages of technical development and the first steps into the market. When it comes to getting a business up and running, an angel investor’s money can make all the difference.
On the other hand, venture capitalists invest in both new businesses and businesses that have been around for a while and are at a more developed stage. This depends on what the venture capital firm focuses on. If a new business shows a lot of promise and growth potential, a venture capitalist will want to put money into it.
A venture capitalist will also want to put money into a business that has already shown it has what it takes to be successful. The venture capitalist then gives money to help the business grow and develop quickly.
Due diligence is different for each
Due diligence is something that angel investors have talked a lot about over the years. Some angels do almost no research, and they don’t have to because the money is all theirs. But it has been shown that angel investors are five times more likely to make money when they do at least 20 hours of research.
Since they have a duty of care to their limited partners, venture capitalists need to do more due diligence. When researching potential investments, venture capitalists can spend more than $50,000.
Which one is better for startups?
All firms require financing (capital) to function. Also, funding is especially important for a startup to stay in business. So, should startups go to angel investors or venture capitalists to get the money they need? As with many money situations, there is no right answer. Instead, it depends on where the business is in its life cycle.
As a general rule, an angel investor might be the best choice for an entrepreneur with a business idea. But if they already have a business and need more money or knowledge to help it grow, a venture capitalist could be the answer.
But it’s important to remember that both angel funding and venture capital have their own problems. Angel investors are easy to find, but negotiating a deal can be hard. Sometimes all you end up with is a back-and-forth conversation instead of a signed contract.
In the end, keep in mind that giving away shares of your company means you have less power to make decisions. So, whether you choose an angel investor or bring on venture capitalists, talk to your financial and legal advisors first. Discuss with them about your hopes and doubts before you say yes to the investment.
