Angel Investors vs Venture Capitalists
Two popular ways of securing startup funding is by entering into partnerships with angel investors or venture capitalists. Learn their differences here.
Securing the necessary funding required for operating your business is one of the most difficult and frustrating parts of owning a business. Even if you have a spectacular business model and an impeccable plan for expansion and growth, it may still not be enough to get the funding you need.
However, there are plenty of ways to get the capital and funds needed to launch your business. Two of the most popular alternative methods include angel investors and venture capitalists (VC).
What Is An Angel Investor?
Sometimes known as a private investor or seed investor, an angel investor is an individual with high levels of net worth who provides the financial backing necessary for a startup or small business to operate.
In return, angel investors require some ownership in the company, stock options, or a return on their investment with interest. An angel investor offers a one-time investment to help a business get started or may continue pumping in funding when required. Naturally, the investor and the owner of the company should discuss and agree on the exact details.
Angel investors typically offer more favorable terms than other lenders. Although investing in the early stage of a business is highly risky, the long-term benefits often result in a higher return rate than traditional investments.
Some angel investors are more interested in the entrepreneur behind the business than the potential profits of a business model. This interest is almost the direct opposite of a venture capitalist.
The Pros Of Angel Investors
- They are willing to take more significant risks than traditional lenders. Since angel investors use their own money, they don’t answer to regulations other than the ones they set for themselves. Most traditional lenders such as banks or credit unions prefer having concrete data and only investing in a secured business. The contracts for loans are often dozens of pages with numerous regulations and timetables for repayments. Angel investors typically require fewer regulations before investing.
- It’s less risky for you as the business owner. In most cases, angel investors don’t require repayment for their investment should the business fail. For most traditional lenders, you have to repay regardless of whether or not your business idea succeeds. It is incredibly stressful running a business when the consequences are financial ruin and bankruptcy. Angel investors assume the risks, so you focus on the company and not the potential consequences of failure.
- Most angel investors have been involved with startups before. Money can’t buy experience. Since your startup is likely your first step in the world of owning and operating a business, you will make many mistakes. But angel investors have probably been down this road dozens of times. Their first-hand knowledge and experience of growing a startup are precious to a first-time owner/operator.
The Cons Of Angel Investors
- The cost of repayment terms is steep and not always simply in cash. Most angel investors don’t want to be paid back in money with interest like a traditional business loan. Instead, they prefer repayment in stakes and stock options of the company. Angel investors require enough of a stake to be a minority shareowner, so you still maintain control of the company; however, you could end up repaying their investment a few thousand times over. The benefits of a $100,000 investment could end up being worth billions, depending on the business and its success. But, even you overpay the investment, you still have a very successful business that you would not have been able to start without the investor.
What Is A Venture Capitalist?
A venture capitalist is an individual who provides capital and funding to emerging businesses that have displayed the potential for growth and profits. Investors start venture capitalist firms as limited partnerships in which the partners invest in the fund of the companies selected by the firm.
There is usually a committee board assembled that makes these necessary investment decisions for the future. Unlike an angel investor, a venture capitalist doesn’t commonly get involved on the ground floor. Instead, they usually search for businesses or firms on the cusp of commercializing their idea and greatly expanding.
Normally, the venture capitalist buys a stake in the company for a low price, helps build and grow the company, and then sells their stake for an incredibly high return on their investment. These types of investments are highly risky and often fail.
However, since the return on investment is astronomical in some cases, venture capitalists don’t need to over-achieve to make a lot of money.
The Pros Of Venture Capitalists
- Venture capitalists often inject extremely large amounts of money into a business. When a venture capitalist firm invests in a company, they often dive right in headfirst. Investing tens of millions of dollars into a business is not uncommon for a venture capitalist firm. Even the most financially stable angel investors and traditional funding sources are usually unwilling to invest those amounts.
- Venture capitalists assume the risk. Like angel investors, most venture capitalists don’t require repayment if the business fails. However, they will not involve themselves with a startup unless it’s as close to a “sure thing” as possible.
- They are professional investors. Although they might not have made their money as a venture capitalist, they are professionals at investing. They make investment decisions daily, gaining or losing millions, so they have plenty of knowledge and experience about the business world. Since several people are involved with a venture capitalist firm, they have connections that provide a great boost to your business and get you off the ground quickly.
The Cons Of Venture Capitalists
- They require a large amount of control in the business. Unlike angel investors who tend to be “hands-off,” venture capitalists become business partners. The firm typically requires enough ownership in the company to be considered a major partner and places members on boards and committees, sometimes severely limiting your control over your own business.
What Are The Main Differences Between An Angel Investor and A Venture Capitalist?
Angel investors and venture capitalists provide similar benefits. However, there are significant differences between them:
- For starters, an angel investor generally invests independently based on their research and belief in the entrepreneur. Venture capitalists are usually a part of a firm, partnership, board, or committee that pools resources and invests in your business.
- There is no limit for the amount of money an angel investor invests in a business, but it ranges from around $15,000 to $250,000. Of course, this amount varies significantly on a case-by-case basis, but angel investors only contribute a small amount of funding to your startup. On the other hand, venture capitalists are comfortable investing $250,000 to $2 million into your business but can go to tens of millions in the right case.
- Typically you involve angel investors in the early stages of your startup before your business officially enters the market. Venture capitalists are more interested in businesses already in the market and are more mature. An angel investor is a person who gives you the money to buy sugar, lemons and plant your lemon trees to open a lemonade stand. A venture capitalist is a person who gives you the money to open dozens of lemonade stands after you have proven successful for an extended period.
- Venture capitalists generally get involved in the day-to-day operations of your business. VCs often require representation and seats on your board of directors and may attempt to influence the daily operations of your business. Angel investors are more “hands-off” and allow you to operate with little to no interference.
Securing funding for your business is a struggle. That struggle is especially apparent in the early stages when you must prove that your business is a safe investment. There are pros and cons associated with angel investors and venture capitalists, but both can provide the funding that you need to grow your business.
If neither of these types of investors fit your business plan, visit Ampla for help securing funding and growing your business responsibly.