Knowing the multiple types of investors that can support the growth of your business requires first understanding how they differ from one another. Whether you own a small firm or a startup, you should understand how to recognise the various benefits that investors might provide you.
Angel investors and venture capitalists offer excellent options to startup businesses. These two investment options are alternatives for companies seeking capital outside usual channels, such as obtaining a bank loan or public offerings. Despite having many similarities, angel investors and venture capitalists are distinct. Making the best decision requires an understanding of their differences.
In this blog, we shall learn more about venture capitalists and angel investors, their differences and their suitability to select the best path for your company.
Who Is an Angel Investor?
An angel investor is a person who invests private wealth in a small firm at an early stage and offers advice to finetune business operations. They could be a resourceful, well-connected individual who has developed a personal interest in your new product, service or business idea. Also, in many cases, an angel investor could be a friend or a relative who has decided to invest some money. A group of angel investors often come together to finance businesses.
Angel investors choose their investments, and in exchange for contributing personal equity, they receive stock in the company. They are flexible with the amount they invest and it is averagely between 5 Lakhs to 2 Crores.
The companies they invest in are generally in the early stages of development and are looking for initial investments to kickstart their venture. This is commonly known as the seed round.
Who Is a Venture Capitalist (VC)?
Venture capital investments are made in high-growth companies by organisations that pool funds from individuals, corporations, pension funds, and foundations. In addition to providing funds, venture capitalists contribute by serving as a member of the investment firm's board of directors, hiring senior management, and offering strategic advice to nurture the business venture effectively.
Instead of providing early funding, a venture capitalist (VC) engages with promising startups and businesses looking to scale their operations. Typically, VCs offer significant resources in exchange of equity and then cash out with a robust ROI. As they have a fiduciary duty to the investors they represent, venture capitalists rigorously evaluate the company's revenue growth prospects, market potential, strong management hierarchy, and unique line of products with a competitive edge before investing. In short, Venture Capitalists are professional investors.
6 Key Differences Between Angel Investors and Venture Capitalists
The following are some notable differences between angel investors and venture capitalists.
1. Source of Funding
Angel investors and venture capitalists differ in the sources of funding provided through each. Angel investors are typically rich people, such as family members, friends, or wealthy individuals, willing to use their funds to support a startup.
While many angel investors are successful entrepreneurs who want to invest their own money in startups with potential, some are professionals such as doctors, lawyers, and other professionals. An angel investor gives the company money in exchange for a percentage of equity in the business.
On the other hand, established venture capital businesses, banks, educational institutions, and insurance companies employ venture capitalists. Therefore the money that the vendor capitalists offer is sourced from their firms. It implies that they often invest using the money of others, frequently investing millions of dollars into companies with a track record of success.
2. Type of Funding
Another difference between angel investors and venture capitalists is the type of funding you receive through these investors. The company usually gets money when angel investing to meet its business expenses.
Although companies get funds from venture capital, there are other ways for venture capitalists to fund them. A common way that venture capitalists fund companies is by providing them with top-tier professionals to work for them. Additionally, they might offer free marketing assistance and other crucial business strategies to help startups expand their clientele or other activities. For example, Sequoia Capital India has provided senior executives to extend their guidance and business expertise to the C-level executives at startups such as Ola, Byju's and Grofers. Accel introduced Slack's co-founders to experienced executives who could help them scale their business, including Stewart Butterfield, who became CEO of the company.
3. Size of Funding
Another distinction between angel investing and venture capital is the amount of money given to a startup. Angel investors typically invest between $25,000 and$100,000, though they often invest more or less.
On the other hand, venture capitalists may invest a significant amount of money in start-ups because they are a part of a larger institution having a substantial financial corpus. For example, in 2020, Indian startups attracted approximately 10 billion dollars of VC investment.
4. Stage of the Startup
Angel investors focus on early-stage businesses and finance the technical development at the late stage and early market entry.
Whereas Venture capitalists invest in more established companies looking to expand their operations. A venture capitalist will seek to invest in a startup with tremendous growth and potential.
5. Investor Involvement
Angel investors are involved in various degrees when it comes to the day-to-day operations of the company. They often do little initial due diligence or execute an appraisal of the company since they are not subject to the rigorous accountability requirements of venture capitalists.
The primary purpose of angel investors is to provide the capital necessary to start a company. While some angel investors provide the investment and hope for a return, others become interested in the company's day-to-day operations, particularly if they have expertise in the area. Although they are not required to participate, the degrees of support and mentoring they provide may differ.
As limited partners, venture capitalists help create successful businesses they consider to have potential. They are less likely to invest in companies that do not have some proven success in their markets. Typically, venture capitalists take part in the Series A round of investments. A company being considered for Series A investment already has a customer base and a steady revenue stream.
Venture capitalists are frequently seen as reliable consultants by business owners who use their connections to expand their clientele or assist businesses from developing their portfolios to overcoming challenges. Additionally, many venture capital companies request board participation through a director position or as an observer.
6. Evaluation of Investment
Angel investors emphasise qualitative elements when evaluating investments, such as the founders' backgrounds, the determinants of business success, product-market fit, etc.
Venture capitalists take into account more tangible measures such as revenue growth rate, average revenue per user (ARPU), customer lifetime value, etc. This is especially true given that venture capitalists have a higher need to defend their investors' choice of investment.
Conclusion
When comparing venture capital with angel investors, there is no perfect solution for all companies.
Angel investors are willing to invest a limited amount of money and are generally more approachable in sales pitches, and prefer mentorship roles. Angel investments are, therefore, perfect for seed finance since the target startup hardly has any verifiable evidence, such as a revenue stream, to persuade the investor.
Contrarily, while venture capitalists can make more significant investments in the company, they also seek a position on the board of directors. If a company needs a lot of funding, like in the case of growing companies, it will have to put up with making decisions in line with a venture capitalist.
It’s normal to have confusion about making the right choice and taking the right direction for your company.
Scalix can help you decide. As an integrated platform, it connects you with potential investors and business partners, shares valuable resources to grow, and provides access to future customers with great convenience.
Sign up with the Early Founder Program to learn or join the Fundraising Cohort to find the right investors for your startup.
