When it comes to investing in private companies, there are two key types of investors that some may refer to interchangeably, but they are different types of investors. Angel investors and venture capitalists (VCs) are similar in that they typically invest in startups, but have many differences including their goals, available resources, and even which startups they choose to invest in. In this blog, we’ll talk about the differences in angel investors vs venture capitalists.
Angel Investors and Venture Capitalists
Who are Angel Investors?
Angel investors are typically considered to be high net worth individuals that invest their own money into privately held startups. The name originated on Broadway, where wealthy individuals would provide capital to put on a play in exchange for repayment if and when the production was a success. Angel investor was coined formally when William Wetzel, the founder of the Center for Venture Research, completed a study in 1978 on how entrepreneurs raised capital[1].
There are a few key attributes that distinguish angel investors.
Investment Strategy & Goal
Angel investors can be flexible with who they invest in and how they invest since they are investing their own money. In general, you could argue that angel investors usually make investments with two goals: helping themselves and helping startups. When it comes to helping themselves, they typically desire the same goal as any investor: making money.
Some angel investors also have the goal of helping startups. They may have resources like potential mentors, partners, or customers that they feel could benefit a startup and the desire to connect people.
Stage of Investment & Check Size
Typically, angel investors invest in earlier stage rounds, like pre-seed or seed rounds. The companies an angel investor may invest in might not even have an MVP or working prototype. Because angel investors are participating in earlier rounds for early-stage companies, they are usually investing smaller amounts of capital per check. An angel investor typically puts in less than $500 thousand or less per round per company[2].
Involvement
Angel investors are generally more hands off in company involvement post investment. Some angels invest more in the entrepreneur themselves than the viability of the business, so they may be confident in the founder’s ability to lead the business and may be less likely to be involved in decision-making[3].
Benefits to Startups
Access to Capital
Since angel investors are investing earlier, they may be taking a higher risk on a startup. It might not have a viable business model yet since it’s still in its earlier stages. This can benefit startups that need that initial capital infusion to get to a working MVP so they can start to test product market fit. Angels’ willingness to take a chance on unproven startups can benefit startups that might not be able to access capital otherwise. Also, angels usually have a less intensive due diligence process than venture capitalists which means the startup may be able to access capital quicker than from VCs.
Connections
Additionally, angels might have valuable connections it can provide to the startups they choose to invest in. From mentors and partnership to customer and other investors, some angels have a vast network that can benefit the startup they are working with.
Advice and Guidance
Additionally, some angel investors can also be startup founders themselves. They may have advice or guidance that can help motivate and inspire a startup founder.
Limitations for Startups
Angel investors also may limit startups. Since angel investors usually take an equity stake in the company, the startup now has another investor to consider when making strategic decisions. This limitation may deter a startup away from angel or venture capital and towards a different funding strategy like debt or bootstrapping.
Who are Venture Capitalists?
Venture capitalists are often firms or funds that invest in startups or other investment opportunities. The origins of venture capital are debated, and some say the concept goes back to the times of Christopher Columbus. The phrase venture capital was coined in a 1938 Wall Street Journal editorial and has become a prevalent term today[4].
There are a few key attributes that distinguish venture capitalists.
Investment Strategy & Goal
Venture capitalists typically are investing other peoples’ money through a fund, their goal may be to generate returns on their investments. They hold a fiduciary responsibility to the fund at which they are employed. This means that venture capitalists usually have a stricter investment thesis and strategy in the hopes of maximizing their contributions.
Stage of Investment & Check Size
Venture capitalists usually want to see some form of product market fit, customer traction, or MVP in a company before they invest. This means venture capitalists are usually investing in early-stage companies at their Series A or Series B rounds. A venture capitalist typically won’t be the first funding for a startup.
A venture capitalist may put in anywhere from $5M to upwards of $100M depending on what round they are investing in and the industry in which the startup operates[5].
Involvement
When it comes to involvement within the startup, there is usually a higher level of involvement and desire to be a part of larger company decisions to help ensure that their investment meets their expectations.
Benefits to Startups
One benefit of venture capitalists is that larger venture capital firms usually have some level of name recognition. Once a startup has received investment from a specific venture capital fund, that can be a driver for future investors to make investment decisions.
Another benefit of venture capital is for startups is receiving larger investments. Startups raising at Series A or Series B are usually starting to gain customer traction and are looking for additional capital to scale and grow. These larger investments can help the startup take operations to the next level.
Limitations for Startups
Similar to angel investors, venture capitalists are also generally taking an equity stake in the startup. This means another investor to take on and consider during strategic business decisions.
Additionally, because venture capitalists are investing other peoples’ money, there is usually a more rigorous and timely due diligence process which means it can take longer for a startup to receive the investment.
Final Thoughts
When a startup is looking to raise capital, they may be faced with the decision of taking angel or venture funding. While the two terms are sometimes used interchangeably, the reality is that each has very specific goals, strategies, investment sizes, timelines, and responsibilities to uphold. If a startup chooses to take on angel or venture capital, they should carefully consider the benefits and limitations of each and make the choice that they feel is best for their startup, current growth stage, and what makes the most sense for the industry in which they operate.
Are you looking to invest in startups? Sign up for a MicroVentures account to start investing!
Want to learn more about key considerations for investors? Check out the following MicroVentures blogs to learn more:
- Investment Insights: Accredited and Non-Accredited Investors
- Tale of Two Metrics: Market Cap and Market Value
- Fulfilling Financial Instruments: Common vs Preferred vs Convertible
- Navigating Deal Sourcing: How to Select Investment Opportunities
[1] https://corporatefinanceinstitute.com/resources/economics/what-is-angel-investor/
[2] https://www.aleberry.com/blog/angel-investor-vs-venture-capitalist-vs-private-equity
[3] https://www.weareuncapped.com/blog/venture-capital-vs-angel-investor
[4] https://kenney.faculty.ucdavis.edu/wp-content/uploads/sites/332/2018/03/how-venture-capital-became-a-component-of.pdf
[5] https://www.aleberry.com/blog/angel-investor-vs-venture-capitalist-vs-private-equity
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
