Angel Investors vs Venture Capitalists – What Are Their Prime Differences?

When it comes to startups, investors are looking to put their money into something that has the potential to grow in value over time. These can be a risky proposition, but they can also be incredibly lucrative.

If you’re not familiar with the term, an angel investor is someone who puts money into a business as a means of helping that start-up expand and take off in a new direction. In contrast, venture capitalists are people who invest money specifically to fund high risk ventures (in other words, startup investing isn’t for everyone).

In the world of business, both angel investors and venture capitalists offer their services alongside one another. Both of these business partners work together to invest in various startups that are seeking funding.

However, thinking about angel investors vs venture capitalists, there are some key differences between the two types of investors. If you want to know more about what these differences are and how you can benefit from either type of investment, keep reading!

What is an Angel Investment?

Angel investing is when a few wealthy individuals put money into the start-up of a friend or acquaintance (source). These are generally people who are already successful and are interested in expanding their network and finding ways to give back to the community.

They typically provide between $10,000-$100,000 in funding. Angel investors typically have a few requirements before they’ll invest in someone’s company.

While the amount of money they put down is usually modest, they usually look for access to the person they invested in. For example, an investor might be interested in joining the board of directors of your company, or getting an executive position as your business grows.

In order to facilitate these types of connections, many angel investors will ask for stock in your company or equity in the company as a whole. You can read more in this article how you can find and approach angel investors in your network.

What is a Venture Capital Investment?

Venture capital investment is when large investment firms put money into the start-up of a friend or acquaintance in the hopes that it will grow and take off. Venture capitalists typically come from a background of investing in stocks and bonds, and this is what they use to try to predict the growth potential of a particular start-up.

Venture capitalists are investors who put money into high risk, high return businesses as explained in this article. These investments are made in the hope of earning a return that has the potential to be exponential — and in turn, become extremely wealthy.

Because of this, venture capitalists are often people who are extremely risk averse. They try to stay away from investments that are purely speculative, opting for investments that have the potential to be incredibly successful.

Investors will back a company like this if they believe that it has the potential to be worth a lot of money. They’re interested in investing in things that are extremely scalable and profitable. They want to see that the company has a good chance of making an impact, and that the potential return on their investment is enormous.

If you would like to learn about the differences between venture capital and private equity, this article will provide some insights.

Angel Investors vs Venture Capitalists: what are the differences?

In both cases, the person who invests is looking to make a return on their money within a few years. However, angel investors are looking to expand their network (in addition to profit), while venture capitalists are purely looking to profit from their investment.

There are other differences listed below:

• Venture capitalists typically invest in a combination of several start-ups at once, while angel investors typically invest in just one company at a time.
• Angel investors vs venture capitalists are generally looking to give you a small amount of money, while venture capitalists are looking to put a large amount of money at risk.
• Angel investors are generally looking for a return on their investment within a few years, while venture capitalists are looking at much longer time periods.
• Venture capitalists are very selective in who they choose to invest in, while angel investors could be anyone who gives them a few thousand dollars. However, top angel investors in your field can also be very selective.
• There are very few legal restrictions on who can be an angel investor. There are many legal restrictions on who can be a venture capitalist.
• Venture capitalists have committees and boards of directors who govern their investments. angels are generally investing in friends or acquaintances.

Pros of angel investing

Below we have listed several main advantages of angel investors vs venture capitalists:

• Involves high-quality networking: If you’re lucky enough to have wealthy, successful friends and family who are interested in investing in your company, this could be a great opportunity for you. If not, try reaching out to other members of your network to see if they know anyone who might be interested in investing
• You’ll most likely be able to meet new people: You’ll be able to use your connections to help you get access to capital
• You may also be able to hire your contacts as employees or advisers: You may also be introduced to an entrepreneur who has started multiple companies, which could help you learn from one of the best in the world
• You might be able to choose to take an equity position in one of your investors’ companies: You might also be able to choose to work at one of your investors’ companies after your company takes off.
• Speed of investment is one of the advantages of angel investors vs venture capitalists: angel investors make investment decisions much faster and in an informal fashion compared to venture capitalists. This is one of the main advantages of angel investors vs venture capitalists.

Cons of angel investing

Companies may not be profitable at the time of investment, and profit may be an issue for the entire business. This can be tricky, but it’s important to remember that investing in startups doesn’t come with a guarantee of profit.

In fact, some startups fail completely, leaving investors with nothing to show for their investment. Beyond the risk involved with investing, there are also a number of disadvantages of angel investors vs venture capitalists for startups.

Some investors may have unrealistic expectations, expecting a lot of growth from a new business in its first couple of years. This can be frustrating and disappointing. Startups may find it challenging to raise money from investors.

Some may struggle to find a way to connect with these people and find out more about their potential investment. This can be frustrating.

Pros of venture capital investing for startups

New technology and processes may be discovered through the business, which can increase its value. For existing businesses, venture capitalists may provide new funding, helping the company expand and make more money. We can summarize the advantages of venture capital as follows:

1. Greater sums of money: Entrepreneurs can raise up to $100,000 for their businesses’ seed stage and more than $25 million for more advanced stages.
2. Better risk management: While formal reporting structures and boards of directors are required for VC funding, startups can lower their risk of making a costly error by hiring an experienced team to supervise business growth and operations.
3. No recurring monthly fees: Entrepreneurs have extra money to reinvest in their businesses since they don’t have to pay a monthly payment or interest because venture capitalists invest in businesses in exchange for private equity.
4. Gaining VC money is a public indicator of a company’s trustworthiness, increasing branding and exposure: While VCs spend up to 50% of their time networking to promote the businesses they invest in, the majority of VC firms have a robust PR team and media relationships, so this is advantageous.

Cons of venture capital investing for startups

Investors may expect high rates of return on their money. If the business doesn’t show the potential to be profitable at an early stage, investors may leave the company.

As with angel investing, some investors may have unrealistic expectations, expecting a lot of growth from a new business in its first couple of years. This can be frustrating and disappointing. There are a few more disadvantages of venture capitalists (or you can say advantages of angel investors vs venture capitalists):

1. Reduced Founder Ownership Stake: You must dilute your equity when raising a funding round in order to issue additional shares to your investors. As a result of this process, founders gradually lose ownership interests in their company.

2. Seeking investors may keep founders away from their company: When all other funding options have been explored and more funding is required for expansion, startups decide it is time to raise venture capital. However, raising money can take a while.
3. Obtaining funding is challenging and rather scarce: The National Venture Capital Association (NVCA) reported that just 5,000 venture capital deals were completed in the US in 2020. Nearly 3,000 of these businesses have previously received venture money.
4. The Total Cost of Financing Is High: Comparing the cost of giving up stock in your business to borrowing money may seem reasonable. But the price of equity is only paid when the company is sold. In addition to funding, venture capital also offers assistance and introductions. But you shouldn’t take the choice lightly, especially if there are other financial options.

Final Words

angel investors vs venture capitalists: which one should you choose?

When you’re deciding whether or not to become an angel investor or a venture capitalist, keep in mind the following points.

If you have the right connections, you could find a lot of benefit in either. Venture capital investments are extremely risky. If you’re not comfortable with this level of risk, venture funding might not be the best option for you.

Angel investing is a lot less risky than venture funding, but it’s still a high-risk investment. If you want to take a less risky path to becoming a successful entrepreneur, an angel investment might be a good fit for you.