Angel Investors vs. Venture Capitalist: The Major Differences

Wondering to know that who will be the winner of battle Angel Investors vs. Venture Capitalist, this post will give you the exact answer.

Finance is the lifeblood of business. Without it thinking of survival of the business is not possible. But many startups in its initial stage faces the problem of raising investments.

And not getting funding on proper time becomes one of the major reasons for the failure of their startups.

So If you own a startup or thinking of doing your own business then definitely a question should come in your mind that from which investor your business should take funds?

So in this article, we will be discussing this hot topic i.e Angel investors vs. Venture capitalist and main differences between them.

Before discussing this topic, first, we will be learning about the definition of angel investor and venture capitalist.

What are Angel Investors?

Angel investors are the individuals who invest in small startups or companies in exchange for equity shares of that company. They are also known as angel funder or seed investors. 

Generally, they use their own money to invest in startups. They provide funds to enterprise in its initial days of working. They are called angels as when no investor is willing to fund early-stage startups then they come and help them.

An angel investor is said to be an accredited investor when he is having a net worth of $1 million or having an annual income of $2,00,000.This criterion is set by SEBI(Securities and exchange board of India).

What is Venture Capitalist?

Venture Capitalists are the firms that invest in high growth potential companies in exchange for equity shares of that enterprise.

Generally, they do not use their own money but utilizes the funds of investment companies, corporations, and funds.

They invest in small companies and more developed enterprises. Their main motive is to earn profit only.

Angel Investors vs. Venture Capitalist: The Major Differences

Now after studying the basic concept the times have come, when we will be discussing the difference between a venture capitalist and angel investors.

Angel Investor vs Venture Capitalist features-:

1. Periods
2. Money invested
3. Return
4. Type of business
5. Role in business
6. what they look in business before investing
7. how to make an investor deck

Angel Investors vs. Venture Capitalist: Periods

Both angel investors and venture capitalists invest in different periods. This helps in judging their ability to take risks.

Usually, angel investors invest their money in the early stage of a startup while on the other hand venture capitalist invest their money on established startups.

Angel investor take more risk as they invest in businesses that have not proven itself to be profitable while on the other hand venture capitalist takes less risk as they invest in young companies after proper analyzing their profit and loss statement and balance sheet.

Angel Investors vs. Venture Capitalist: Money Invested

The major difference between angel investors and venture capitalist is that angel investors use their own money to invest in a company while on the other hand venture capitalist uses funds of investment companies, corporation, and other people.

Because of this VC firms invest more amount as compared to angel investors. The average amount invested by an angel investor is between $5,000-$5,00,000 while the average investment of VC firm is in millions of dollars.

Angel Investors vs. Venture Capitalist: Return

Venture Capitalists expect a higher rate of return as compared to angel investors on their investment.

Angel investor expect their return after 5-7 years with an expected rate of 20%-25%.On the other hand, venture capitalist expects their return in more years with a rate of 25%-35%.

Moreover, it is subjective and depends on the nature of your business and type of investor.

Angel Investors vs. Venture Capitalist: Type of business

Usually, angel investor invest in a startup which they feel can give them higher profits in the future. But on the other hand venture capitalist only invest in targeted startups.

They like to invest more in software, technology, and biotech companies.VC firms are more cautious about their profit as compared to angel investors.

Angel Investors vs. Venture Capitalist: Role in business

Angel investors provide financial help to startups in their struggling time. But his role is not limited to this only. 

If the startup wants to take advice from him then he is always ready to guide them. Earning profit is not his main motive but to help startups grow is his main agenda.

He acts as a mentor for small companies and guides them to grow in every step of the business.

On the other hand, as a venture capitalist invests in developed companies that already have a talented management team so his main focus is not to become a mentor. 

His role in business is to help decide the board of directors and to recruit the senior management team. His main motive is to earn profit only as compared to an angel investor.

Angel Investors vs. Venture Capitalist: What they look in business before investing

As Angel investor invests in a pre-valuation startup so their decision of investing is not influenced by profit and loss, sales, and balance sheet of that firm.

But there are certain points which they look into business before putting their money. These points are-:

1. They look for the vision and belief of founders.
2. They look for a good management team.
3. They look for good return as they are taking more risk by investing in an early-stage startup.
4. They look for a fantastic and long-term business plan.
5. The most important thing is that every angel investor looks for an exit strategy i.e how they will earn a return by selling equity shares.

On the other hand, Venture capitalist has a different point of view. The points which influence their investment decision are-:

1. They look for a professional and talented management team.
2. They look for a bigger market share in which the company can earn more than $ 1 billion in revenue.
3. They look for the quality of the product you are offering to consumers. They also look for the ability of the product to compete in the market.
4. They look for the strategy of the business in the next 10 years.
5. Sometimes they see previous data of the business to predicts its future.
6. Generally, they invest in the long term so they measure the risk of business and product.

Angel Investors vs. Venture Capitalist: How to make an investor deck

If you want to take investment from both an angel investor and venture capitalist then its mandatory that you need an investor deck.

Basically investor deck is needed to represent the information about your startup and business pan. Your presentation should be precise and should impress investors the first time only.

For getting funding in first attempt investors do want to see minimum slides in your PPT.

For this, you can read-: The advanced guide for making an investor deck.

Advantages And Disadvantages Of Angel Investors

Now after discussing the comparison we will learn about the advantages and disadvantages of angel investors which will help to make your vision more clear.

Advantages of Angel Investors

1. Willing to take bigger risks

Angel investors invest in the early-stage of startups. At this time there is no investor in the market to take such a big risk. Even banks do not give a loan at this stage. 

It is the angel investor only who gives funds to the startup when they actually need it. They provide a sufficient amount between $5000-$5,00,000 to the small companies.

2. Helpful as a mentor

Angel investor not only provides funds to startup when they actually need it but if founders want any advice from them then they are always ready to give guidance.

They are experienced persons and can be very helpful while making crucial decisions.

3. No pressure for giving funds back

When you borrow money from a bank then there is pressure on you that you have to pay monthly installments with interest every month. It is mandatory for your business.

But in the case of angel investors, there is no such pressure. He gives you funds in exchange for equity shares which is generally 10 % of your total shares.

There is no stress of giving him return every month. He helps you to grow your business and when after some years, the valuation of your company increases then he lefts the company by selling his shares.

Disadvantages of Angel Investors

1. Loss of complete control

One of the biggest disadvantages of working with angel investors is that you do not have complete control over your decision-making process.

Sometimes he forces you to take a decision in a different direction in which his profit is there. The main problem comes when you raise investment from an inexperienced angel investor.

So for the proper growth of your startup, you should hire experienced persons only.

2.  Less structural support

Angel investors provide less structural support to the business as compared to an investment company.

Advantages And Disadvantages Of Venture Capitalists

Now below we will discuss some advantages and disadvantages of a venture capitalist.

Advantages Of Venture Capitalists

1. They invest a large amount of money

The startups who are looking for big investments and who want to expands their business on the large -scale, the venture capitalist is the best option for them.

This is because they usually invest in millions of dollars. That much amount is sufficient for scaling to a big company.

2. No obligation to pay the money back

The biggest advantage of collecting funds from venture capitalists is that there is no obligation of paying back money every month. This is different from banks in which it is mandatory to pay the money back with interest.

3. They bring business expertise

The venture capitalists have a large number of talented and professional individuals who can guide you to grow your business in the market.

They help you in recruiting the senior management team. They can help your startup in taking major business decisions.

4. Help your startup in developing relationships

Generally, venture capitalists are big firms, so they maintain relationships with other big companies. This can help early-stage startup in getting resources from these big companies.

They can make good relationships with these big firms at a very early stage.

Disadvantages Of Venture Capitalists

1. Loss of control

The biggest disadvantage of a venture capitalist is that they possess some control of your business. This is because they have invested a very large amount in your business and apart from equity shares, they also want to participate in the decision-making process.

Sometimes the decision of founder and venture capitalist matches but when both parties have a different opinion then it becomes a problem for business.

2. Loss of ownership

As venture capitalists contribute millions of dollars in one company, so sometimes in exchange for money, they demand the majority stake in the company.

And due to lack of funds, some startups agree to the contract, and later they losses full ownership of their company. The result is that the founders are even unable to participate in the decisions making process in their own company only.

Similarities Between Angel Investors And Venture Capitalists

Now below we will discuss some similarities between both the investors which will give you a clear idea about this topic-:

Both are an alternative source of funding

The main similarity between angel investors and venture capitalists is that they both provide funds to small startups and companies.

This means in initial days when startups cannot raise funds from the bank and other big investors then they help them by providing financial help.

They both invest in innovative startups

Both angel investors and venture capitalists like to invest in innovative startups or ideas related to software, technology, and innovative product.

The reason behind this is that they know these types of startups show very fast and massive growth.

They both follow the same entry and exit

Both angel investors and venture capitalists provide finance to startup in exchange for equity shares and when the startups grow after some years, they both sell their share and earns profit from them. 

FAQ On Angel Investors vs. Venture Capitalists

Now we will discuss some common question which will help you to feed this topic in your brain-:

Are angel investors venture capitalists?

No, They both are not the same. Angel investors are the persons who invest their own money while venture capitalists are the persons or firms who invest money from big corporations, and investment companies into startups.

What does an angel investor expect?

The angel investor usually expects a high return which is between 20%-25% within 5-7 years.

Do you have to pay back an angel investor?

No, officially you do not have to pay back money to angel investors. This is because he has already got equity shares of the company in which he has invested. So, he will earn a profit when the price of his shares will grow with the growth of the company.

How can I become an angel investor with little money?

According to SEBI(Securities and exchange board of India), an angel investor is said to be an accredited investor when his total net worth is $ 1million or he is earning $2,00,000 per annum.

Is angel investing profitable?

Generally, angel investors take more risk by buying equity shares of a startup in an early stage. They usually buy 10% of the total shares of that company. So, an angel investor has said on average that 11 percent of their total portfolio yields profit for them.

Conclusion

So, this was all about the battle of Angel investors vs. Venture Capitalists. I hope your all doubts are cleared in this article.

Raising money from which investor totally depends upon the nature and requirement of your business

If you like this article so please share it on Facebook, Twitter, LinkedIn, and other social media platforms.

You may also read-:

Ritesh Agarwal biography: The youngest billionaire in India.

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Tags-: Angel Investors vs. Venture Capitalist, Difference between angel investors and venture capitalists, Advantage and disadvantage of angel investors

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