Angel Investors vs. Venture Capitalists - The Difference Explained

As your emerging company or startup grows, new sources of funding are needed to expand the company in a new direction. Business expansion, though, can’t happen without fundraising.

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To raise money every company should figure out what kind of funding would be plausible for the business. Although there are a lot of options when it comes to funding, this article will explain what’s the difference between angel investors and venture capitalists as they are more relevant to emerging businesses. 

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You don’t have to bother your head with questions like which form of investment is better - angel investors vs venture capital, because in this article you will find everything you need to form a decision.

Who Is an Angel Investor?

An angel investor is an individual who provides a huge cash injection out of their own wallet to support an early-staged business or a promising start-up. As a response, the investor will receive convertible debt or equity. You can think of angel investors as a rich person who’s in
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Angel investors may be accredited, meaning they are officially recognized by the Securities Exchange Commission (SEC), but not all of them are.

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In order to become an accredited investor, an individual is required to meet one of the 2 criteria set by the SEC.

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An accredited investor may be anyone who:

• Has annual earnings of $200 000 for the past two years, with a likelihood of similar earnings forthcoming.
• Has a net worth of $1 million.

An Angel Investor Assumes Greater Risk

As most of the companies that an angel investor’s capital flows into are in their early growth stages, the risk of a business failure is higher. Because several aspects of the business are not yet proven, the investment may be regarded as risk capital. Thankfully, angel investors invest their own money and therefore, aren’t afraid of taking higher risks like banks and institutions.

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Since the investor considers the probability of losing their capital to be higher in the very beginning stages of business growth, they pursue a bigger amount of equity in the company.

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Additionally, the angel investor may wish to reserve a place in the board of the company. This totally depends on the proportion of money that was initially invested.

A Highly Knowledgeable Individual

Business angels are company founder’s themselves, many of them being responsible for the success story of a million dollar company, opening doors to a generous amount of indispensable knowledge. Angel investors have usually had prosperous careers that are accountable to their personal wealth breakthroughs, although you can also become an angel by inheriting your wealth.

Who Is a Venture Capitalist?

A venture capitalist is a person or group that shares a pooled fund designed to invest in businesses that have very strong growth potential. These are usually high-risk startups. The pooled fund - mainly institutional funds - could also be invested in a certain sector, geographic area, or a peculiar stage of business growth. Similarly, venture capital firms take an equity stake in the business in return for capital.

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Venture capital firms precisely choose where they allocate they’re money. It is important to emphasize that venture capital firms are often associated with “Series A, B, and C”, which implies different growth stages of the business that it seeks for venture capital investment.  Venture capital is typically offered in return for an ownership share and active role in the company.

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You may wonder why venture capital firms decide to invest when the risk is high, but the answer is simple. The potential for the speculative startup to rapidly grow neutralizes the possible risk for the company to fail, and as a result, incentivizes venture capitalists to invest their money.

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If you wish to learn more about venture capital firms, check out the list of top 6 crypto venture capital firms by Coinboosts to get an in-depth analysis of the nature of VC’s and its current leaders.

What’s the Difference Between Angel Investors And Venture Capitalists?

When companies seek funding, a question whether to involve an investment from business angels or venture capital firms may arise. The contrast between business angels and venture capital funding is actually very noticeable. The difference firstly comes out from the characteristics of the investors and secondly, the terms they have set on their investments.

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Continue reading to find out how they differ in aspects such as the amount of money both investors typically invest, how they choose potential companies to fund, and to what extent they’re included in the companies’ everyday processes.

Investment’s Source and Amount

An angel investor usually takes an investment out of his own pocket. Those individuals typically look to invest their own assets. On the contrary, venture capitalist investors use pooled investor capital, which means they’re own money will not be touched.

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The major difference between angel investors and venture capital comes from the amount of money that venture capital firms invest compared to angels. Since these two forms of capitals come from different sources, the investment amounts are considerably different. Angel investors have relatively smaller investment funds compared to venture capitalists.

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Considering that angel investors solely invest their own funds, the investments stay below $100 000. Venture capital companies, on the other hand, possess much more funds to play around with, because they’ve gathered the money from a large number of investors. For this reason, a usual venture capital investment starts from $3 million.

Business Selection And Stage

By and large, angel investors step into the game in businesses that are in the early-stage, for example, startups. Those kinds of companies are typically just starting to engage in technical development. They may decide to fund businesses based on a bit of loose criteria. Also, the process of deciding whether or not to invest money is often shorter.

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As venture capitalists don’t invest their own money, a profound research is conducted to match certain criteria, for example, the founder of the company should be an acclaimed or already successful individual. The investment criteria is generally very narrow and it may take more time. Most frequently, venture capitalist firms choose to invest in IPOs, mergers, and growing businesses that are more prevalent, deciding on their growth stages.

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A venture capitalist will opt for a business that has a proven track record and can demonstrate it has everything it needs to succeed in the field. The funding provided will allow very rapid development and growth.

Level of Involvement

In most cases, money alone won’t guarantee the successful development of a start-up company. Business angels join the company in its very early ages. The investment of angel investors, though, most certainly contains more than just capital.

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When angel investors invest, the investment itself usually consists of three elements:

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• Money.
• Time.
• Network of contacts.

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Due to the fact that an angel invests its own funds, the investor will spend some time on communication with the entrepreneur and development of the company even though the devoted time is limited since it competes with the investor’s own free time and hobbies.

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Keeping that in mind, it is more than sensible to involve angel investors in the early stages of your business, because they can not only provide funding but also support with their experience and contacts.

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Venture capitalists are not interested in running the business from the start. When you consider getting funding from them, acknowledge that they expect high level involvement in your company’s decision-making process. They might, at a minimum, ask for a seat in the board This may effectively remove your position as a leader.

Investment’s Length

Angel investors don’t stay longer than two to five years before they decide to exit the investment, whereas venture capitalist firms maintain their positions for a considerably longer time. 

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Conversely, venture capital typically has a much longer investment horizon than ordinary financing. A standard timeframe for a venture capitalist to stay invested is at least ten years.

Pros And Cons

Business financing is a topic that requires knowledge and can’t be made overnight. Although additional funding from angel investors and venture capital firms may kickstart your business and help it reach new heights, it is more than recommended to think about the pros and cons these forms of investments have before you choose the right form of investment that suits the needs of your business.

Angel Investors…

• Are business-minded individuals.

Thanks to their entrepreneurial minds, angel investors have very ample knowledge when it comes to business.

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• Require larger stakes.

One of the biggest disadvantages of business angels is the fact that the investment they make often entitles them for a larger stake in your growing company. This means it might reduce the amount of control you have over managing your business.

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• Take bigger risks against banks or venture capital firms.

Since they invest their own money, angel investors are not beholden to any institution or bank. So the investment risks that a traditional funder avoids is not of concern for a business angel.

Venture Capitalists…

• Supply with hefty investments.

As the fund that venture capitalists possess is a result of many investments made by other investors, they often make very large investments in startups.

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• Low risk to an entrepreneur. 

If the venture somehow fails, venture capital firms don’t require repayment, making it a safer option for growing your business. The same principle applies to angel investors.

Conclusion

Funding a business is one of the first and most crucial steps to grow your company if not the most important. How a business owner chooses to fund its company will affect both how the business is structured and how you run it.

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Since there are no identical businesses, each company has individual needs, meaning no solution is suitable for everyone in terms of how you finance your business. If your company is in its early stages or you’re founding a startup, consider investments in the form of venture capital investments or find angel investors who are willing to help you on your journey.

Angel Investors vs. Venture Capitalists

To outline the most important parts of the article, here is a concise summary.

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• An angel investor is a person with a high net-worth who invests in emerging companies. 
• A venture capitalist is a private investor that usually provides capital to high growth potential companies.
• Angel investors usually work alone, whereas venture capitalists are accompanied by other individuals who belong to a larger firm or company.
• The investment’s size also depends on the form of investment:

• Angels invest from $25 000 to $100 000, but if they decide to form a group, the ordinary investment could be even more than $750 000.
• Contrarily, venture capitalists involve around $7 million in investments.

• Most venture capital firms seek an ambitious product or service with a skillful management team. In addition to money, angel investors offer financial assistance thanks to their great amount of knowledge.