The world of business can be complicated at times. One of the most confusing parts is when it comes to financing a company. There are two types of investment, an investor and a venture capitalist, but what’s the difference? This blog post will discuss what investors and venture capitalists mean, the key differences between them, how they work together, and more.
About Angel Investors
Angel investors are wealthy individuals who invest their own money into startup companies. These investments typically take the form of convertible debt or preferred equity, meaning that the angel investor will get paid back in addition to earning a profit before any other stockholders if and when the company is ever sold.
Working with angel investing groups has massive benefits
- Angel investment groups are forming in more significant numbers.
- The amount of money available to businesses is increasing.
- It takes less time to get money. The conditions are usually the same as those offered by venture capitalists.
- Angel investors typically invest in a company’s early phases. Angel investors are frequently used to support a company’s early market launch and the last stage of technological development.
- Whenever it comes to decision-making, angel investors don’t rely on anybody else.
About Venture Capitalists
Venture capitalists are the bridge between investors and startup founders. They have experience in both, typically working as an investor or entrepreneur for several years before joining a venture capital firm. Venture Capitalists often work with other investors to help raise money from limited partners, which can be institutions or high net-worth individuals that want exposure to early-stage investment opportunities.
Angel investor vs. venture capitalist: what’s the difference?
An angel investor is a wealthy individual who invests in start-up companies, usually with less than $20 million of capital under management. A venture capitalist (or VC) uses money from an investment firm to invest in new and still unproven businesses that show growth potential. Venture capitalists will often write more extensive checks than angels because they typically manage more funds or have access to funding through their contacts at large banks or insurance companies.
They’ll also sometimes provide additional services like strategic advice on how to grow your business beyond just writing you a check for financing it.
Below are some significant distinctions between angel investors and venture capitalists.
How they work
One distinction between venture capitalists and angel investors is the type of funding they invest with.
A venture capitalist is a person or a company that invests in small businesses using cash from investment firms, major organizations, and pension funds. VCs often do not invest their money in startups.
An authorized investor who invests in small enterprises with their own money is known as an angel investor. To be deemed an accredited investor, they must have a net worth of $1 million and an annual income of at least $200,000. Most angel investors are relatives and friends of small company entrepreneurs.
Small company angel investors are more concerned with assisting in a company’s growth than with making a quick profit. As a consequence, their terms may be more palatable than those of a venture capitalist.
When they invest
Angel investors and venture capitalists invest in companies at various phases of development. The type of investor you approach is determined by whether you are a well-established company or just getting started.
To decrease the danger of losing money, venture capitalists prefer to invest in well-established firms.
Angel investors are more inclined to invest in firms that are still in the early stages of development. Even if the firm has not yet proved itself, they select enterprises they are intrigued in and can see success. Angel investors, as a result, take more risks than venture capitalists.
Another distinction between an angel investor and a venture capitalist is the amount of cash they are willing to put into a firm.
Venture capitalists (VCs) make larger investments in firms than angel investors. The average venture capital deal, according to the Small Business Administration, is $11.7 million.
According to the SBA, the average angel investment is $330,000. Angel investments are in the hundreds, whereas venture capital investments are in the millions.
Venture capitalists and angel investors expect different returns on their investments. Venture capitalists anticipate a greater proportion.
Angel investors may expect a 20% to 25% return on their investment.
Venture capitalists can anticipate a 25% to 35% return on their investment.
An investor’s role in the business
What do investors expect once they invest in your small business?
Both venture capitalists and angel investors want a stake in your company and/or some to say over how it operates. They want to make sure they get a good return on their investment as they put money into it. After investing, venture capitalists may demand that you form a Board of Directors and grant them a seat on it. They are often not interested in serving as mentors; however, this varies per business.
Many angel investors serve as mentors to their protégés. They might provide you advice on managing your business, link you with attorneys, accountants, and banks, and assist you with decision-making.