In this post, we will talk about angel investors and venture capitalists and what they look for. Both are sources of investment for your company. But there are some key differences in their approach, which as an entrepreneur you should know about before you chalk out your financial strategy.
Angel investors are usually affluent individuals with a net worth of $1 million or more, or who has an income of $200,000 per year (or $300,000 for a married couple) with the expectation that this income will continue into the future. Venture capitalists are usually private firms or companies that use other people’s money. They raise that money by offering investors a chance to take part in a fund that is then used to buy shares in a private company. Angels usually support entrepreneurship and invest in the entrepreneur as a person. Venture capitalists are more process involved; they mainly evaluate deals and make offers. Some venture capitalists also invest as angel investors. This often happens when they see a deal that is too early for, or otherwise not a good fit, with their venture fund’s goals, and decide to invest their own money into the company.
These are the key differences between an angel and a venture capitalist:
Investment: Angels typically invest between $25,000 and $100,000 of their own money. While there are deals that are more than $100K and less than $25K, this is the area most angels fall into. Venture capitalists invest an average of $7 million in a company.
Stage of investment: Angel investors usually invest in deals earlier than venture capitalists. Angel investors most commonly fund the last stage of technical development and early market entry. Venture capitalists will then come in with a round of investment to take the company through rapid growth until it is ready to go public or be acquired, so the money they invest will be increasingly larger as the rounds progress.
Professional vs. non-professional investors: Venture capitalists are professional investors, in the sense that their job is to make investments. Angel investors do not invest for a living. They often have another job or source of income.
Board involvement: Angel investors may or may not want a seat on the board. Venture capitalists usually want a seat on the board so that they can have more say in corporate decision making.
Due diligence: Angels range from due diligence that might include having coffee or lunch with an entrepreneur to doing more thorough background checks and research with experts. Venture capitalists have to do a lot more due diligence because they have a fiduciary duty to their partners.
Returns: Angel investors usually take the risky approach. They go by an early-stage investment strategy in which they can receive more slow and modest returns over their entire portfolio. Venture capitalists take the conservative approach. Even though VCs invest in all stages of a company, they believe in the “home run theory” of investing, in which later-stage companies (mature, high market capital companies) will minimize their risk of loss.
If your company is in the early stages, angels will usually be your first source of funding. Venture capitalists will come on board at a later stage when you have reached a certain level of growth to take the company to the next level. In conclusion, it’s best for an entrepreneur to start up on their own or with the help of an angel investor. After running and evolving the business, the next best course of action is turn to venture capitalists when you believe you are ready to take your company to the next level and will need a serious amount of capital to do so. Before you even consider approaching a venture capitalist, you will have to demonstrate that you have a degree of success in your past, which is where the first round of your funding and management of your cash flow will come in handy. It is important to seek good financial and legal advisers.
Please do not hesitate to contact us with any questions or comments. Please note that the information on this blog post or in any other part of this site does not constitute legal advice to you for your specific circumstances. For actual legal advice, please be in touch and we will attempt to assist you or refer you to the appropriate advisor. Peter Adams, How do Angel Investors differ from Venture Capitalists? http://www.rockiesventureclub.org/2014/01/how-do-angel-investors-differ-from-venture-capitalists/  http://www.thebusinessangel.org/difference-businessangel-venturecapital.html  http://www.go4funding.com/Articles/Business-Funding/Differences-Between-Angel-Investors-And-Venture-Capitalists.aspx  http://www.growthink.com/businessplan/help-center/what-difference-between-angel-investors-and-venture-capitalists#  Peter Adams, op. cit.,  Peter Adams, op. cit.,  http://www.growthink.com/businessplan/help-center/what-difference-between-angel-investors-and-venture-capitalists#  Peter Adams, op. cit., Peter Adams, op. cit.,  http://www.go4funding.com/Articles/Business-Funding/Differences-Between-Angel-Investors-And-Venture-Capitalists.aspx  Rishi Anand, Angel Investment Funding Vs. Venture Capital investment – The Real Story,http://www.venturegiant.com/news-channel-355-angel-investment-funding-vs-venture-capital-investment.aspx
Hari is a corporate lawyer with experience in Information Technology, Renewable Energy and Nuclear Energy. He has worked in Canada, the US, Denmark, the UK, and India. in addition to his big-law experience, he was General Counsel at an US based IT Services company supervising internal and external counsel in various jurisdictions.