Angel Investors vs. Venture Capitalists: Key Difference

Introduction

Entrepreneurs usually do not have the money to start their business and have to look for alternative sources of funding. If you do not want to seek a corporate loan, you will have to find an equity investor instead.

There are several types of equity investors, including venture capitalists and angel investors. Each person has their own advantages, priorities, and points of view. Knowing the differences between Angel Investors vs. Venture Capitalists can help you make the right decision for the future of your business.

An angel investor: what is it?

An angel investor contributes a significant amount of their own money to an early-stage company. In exchange, an angel investor receives convertible debt or shares.

Many angel investors are accredited, however not all of them are. Accredited investors must meet two conditions set out by the U.S. Securities and Exchange Commission (SEC):

In the last two years, angel investors should have earned at least $200,000 a year, and they should have a reasonable prospect of doing so in the near future. If the angel investor files taxes jointly with their spouse, their required annual profits increase to $300,000.

They must have a total net worth of at least $1 million, regardless of whether they are married or file taxes.

Some benefits of angel investors include the following:

• Angel investors invest anywhere and however they see fit. Compared to banks or venture capitalists, angel investors take on more risk. They are not bound by banks or other institutions, so they can invest their money however they — and only they — see fit. According to this, angel investors might not be worried about what conventional funders might view as a high-risk business loan and avoid.
• Angel investors provide less risk to the borrower. Compared to other forms of funding, angel investors pose a lower risk to business owners. Angel investors often do not need repayment if your company fails, making them a less risky option for business expansion.
• Angel investors are well-versed in the business sector. Many persons who are wealthy enough to be regarded as angel investors made their fortunes via entrepreneurship. When you are beginning a business, you could find their business skills helpful.
• The largest disadvantage of angel investors is that they desire a large investment in your company, which limits your management power.

A venture capitalist: what is it?

A venture capitalist is a person or organisation that invests money in high-risk companies. Since the potential for rapid development outweighs the risk of failure, venture capitalists are typically urged to invest in startups. After a given period of time, the venture investor could buy the whole company or, in the event of an IPO, a sizable chunk of its stock.

Some benefits of venture capitalists include the following:

• Venture capitalists spend substantial sums of money in startups. Because they regularly make sizable investments in firms, venture capitalists may be your best source of funding if you need a significant cash boost to get started.
• Venture financiers do not provide any risk to business owners. Like angel investors, venture capitalists often do not seek payment if the firm fails.
• Venture capitalists are a great source of contacts and knowledge. Like angel investors, venture capitalists possess a lot of relevant experience. They also have many contacts, such as other investors, business leaders, and helpful outsiders.
• Venture capitalists have the primary disadvantage of granting entrepreneurs less control over the management of their businesses. Sometimes, venture financiers demand a majority ownership in your company in order to successfully remove you from full leadership.

Read blog: A Complete Analysis of Startup India Registration

What distinguishes venture capitalists from angel investors?

As two of the most well-liked alternative funding sources, venture capitalists and angel investors have a lot in common. Both cater to innovative start-up companies and favour companies in the scientific and technology industries. However, there are a few key differences between venture capitalists and angel investors.

1. Angel investors function independently, while venture capitalists are part of a business.

Angel investors, often known as business angels, are people who lend money to start-up businesses. They are wealthy and often influential individuals who choose to invest in high-potential companies in exchange for an ownership stake. Since they are spending their own money and there is always a risk, an angel investor is reluctant to support a business owner who is hesitant to give up a piece of their company.

On the other hand, a handful of seasoned investors make up venture capital firms. Private individuals, corporations, pension funds, and charities will provide their money. The phrase “limited partners” describes these investors. On the other hand, general partners, who collaborate closely with founders or entrepreneurs, are responsible for overseeing financial management and ensuring that the company is expanding in a stable manner.

2. Angel and venture capitalists invest different amounts.

You must be well-informed about the financial resources that venture capitalists and angel investors may provide before reaching out to them. Though they occasionally give more or less, angel investors typically donate between $25,000 and $100,000 of their own money. The average income of a group of angels may exceed $750,000.

Because of their relatively limited financial means, angel investors may not always be able to meet a company’s whole funding demands, even if they are usually a quick cure. Conversely, venture capitalists usually give a company $7 million.

3. Angel and venture capitalists have different goals and functions.

Angel investors primarily offer financial support. Although it is not necessary, they could provide you advice if you ask for it or put you in touch with powerful individuals. Both the angel’s personal tastes and the company’s goals dictate how involved they are.

A venture capitalist looks for a product or service with a sizable potential market, a knowledgeable management team, and a substantial competitive advantage. Once convinced and funded, venture capitalists add genuine value by helping to build successful enterprises.

A venture capitalist may help with a variety of things, including identifying a company’s strategic focus and recruiting senior management. CEOs will have access to them as a sounding board and source for guidance. This boosts a business’s earnings and prosperity.

4. Angel investors only provide funding to new businesses.

Angel investors focus on early-stage companies and encourage late-stage technology development and early commercial penetration. Its funding might be crucial when launching a firm.

Conversely, venture capitalists can invest in both early-stage and more established enterprises, depending on the area of expertise of the venture capital company. A company with great promise and room for expansion will attract the attention of a venture capitalist.

Additionally, a venture capitalist will be eager to provide funding to a business that has demonstrated success and can prove it has all the necessary components. The venture investor then contributes money to facilitate rapid growth and development.

5. Angel investors and venture capitalists do distinct due diligence.

Due diligence has been a topic of much discussion among angel investors over the years. Some angel investors do virtually minimal due diligence since the money they invest is their own. However, it has been shown that angel investors who perform at least 20 hours of due diligence have a five-fold increased likelihood of seeing a positive return.

Venture capitalists need to do greater due diligence since they have a fiduciary obligation to their limited partners. Venture capitalists may spend more than $50,000 researching possible investments.

How to make a pitch to an angel investor

Angel investors may be more interested in your startup’s ideas or staff than in its potential for rapid financial success. Consider the following while pitching your concept to an angel investor:

• Look for the right angel investor. Because many angel investors specialise in a certain area, look for those who have experience funding your company or product.
• Deliver a compelling sales pitch. Present an angel investor with the essential elements of your company, including the size of your market, the products and services you provide, the shortcomings of your rivals, and, if relevant, your existing sales, as well as the team’s abilities that make the venture profitable.
• Tell your story to your angel investor. Emotion is key when appealing to angel investors, who are frequently single people who invest in startups that seem innovative and intriguing. Write your narrative, focussing on how you developed the initial idea and proved it.
• Describe your vision in depth. When you pitch your ideas to the investor, highlight the tremendous possibilities. Display your excitement for the business concept and your commitment to carrying out market research. Use visual aids and show real product creation prototypes if you can. Make an impression on them by showcasing your team’s diversity of skills, collaboration, and shared understanding and vision. A well-thought-out startup marketing plan can help you make an impact.

How to make a venture capitalist a pitch

When you pitch to venture capitalists, you emphasise “the steak,” or your company’s financials, more than angel investors do “the sizzle.” You may successfully pitch to a venture investor by using the following tips.

• Show how your offering solves a problem. In the opening of your venture investor presentation, state how your company can address a common consumer problem and how many customers want that problem fixed. Prepare a business plan and pitch deck for the meeting that includes both actual and anticipated financial facts.
• Calculate your profits. At your pitch meeting, you will provide a four-year revenue and expense estimate for your business. You want to show the venture capitalist that the long-term return on investment outweighs the short-term danger. You need to be well-versed in the statistics and all the factors that might have a good or negative impact on them in order to be able to competently react to questions.
• Show barriers to entry. You must also demonstrate that there are significant obstacles to entry, making it challenging for well-funded companies to steal your market share and copy your company strategy. This might be proprietary technology, copyright and patent protection, or exclusive access to a resource that is in high demand.
• Discuss the company’s development potential. In addition to discussing the anticipated gross and net revenue, discuss the company’s enormous growth potential. They will want to see that there is a substantial market for your business and that it provides a clear and unique benefit to its customers. Be ready to explain how your company will grow to meet this demand, such as by making investments in new locations, forming joint marketing agreements with large companies, or increasing the amount of space needed for manufacturing and inventory storage. Venture capitalists like to invest in companies that will see exponential growth because they will be able to recoup their investment with a solid profit margin in three to five years.
• Be honest about your weaknesses. If there are areas where the company does not have distribution, vendor relationships, or key personnel, be honest about it. Venture capitalists, who often have these resources available to them, will want to know how they may become involved if they choose to invest.
• Be tenacious. Be well prepared, but if you receive a negative reaction, do not give up. Use the lessons you have acquired to improve your next pitch to venture capitalists.