While getting an investment from family and friends may be helpful, a startup company may need some additional capital funding to get the business off the ground, so many companies will consider venture capitalists or Angel investors as alternate sources of funding. To make the best financial decision for one’s growing business, it becomes important to understand the difference between the types of investors in this venture.
Angle investors and venture capitalists are two of the most common alternative sources of funding. Angles and venture capital firms focus on cutting-edge startup companies that are aware of their industries and favour companies in the science and technology sectors. There are a lot of significant differences between venture capitalists and angel investors. While angel investors are wealthy individuals who invest their own money in various startups and companies, venture capitalists are employees of risk capital firms who only invest other people’s money in businesses.
Continue reading the article to discover the difference between angel investors and venture capitalists and why you should know it.
What is a Venture Capitalist?
An individual or organization investing in high-risk startups is a venture capitalist. Venture capitalist funding is a more process-driven approach to investing. Due to the growth potential of startups, venture capitalists invest in them, which helps them to outweigh the risk of failure. Suppose a company performs well after a certain amount of time. In that case, venture capitalists may fully acquire the company or purchase a significant number of shares in the event of an initial public offering (IPO).
Who is an Angel Investor?
An early-stage startup receives cash from an angel investor, and in exchange, the angel investor receives an inquiry or converts debt.
The term “angel investor” describes a qualified, wealthy individual who contributes their funds to early-stage startups or businesses in exchange for startup equity. Angel investors may contribute and help the new startup with business expertise, their network, and the supply chain.
Difference between Angel investors and Venture capitalists.
The two most popular alternative funding sources are angel and venture capitalists, which share several characteristics.
Both angel investors and venture capital firms favour cutting-edge startup businesses, and both frequently favour businesses in the technology and scientific fields. However, you should be aware of a few distinctions between venture capitalists and angel investors.
- An angel investor works alone, whereas a venture capitalist is an employee of the company.
Angel investors or business angels are people who put money into a startup. Angles are rich, have influential power, and choose to invest in high-potential companies in exchange for an equity stake. Keeping in mind that they are investing their own money and there is always a chance of risk, it is highly unlikely that an angel investor will invest in unwilling business owners to give away a part of the company.
On the other hand, a venture capital firm comprises a group of experienced investors, and their funding comes from private individuals, pension funds, foundations, and businesses. These financiers are referred to as limited partners, while general partners are those who collaborate closely with founders or entrepreneurs and are in charge of managing the fund and making sure the business is growing healthily.
- Responsibilities and motivations are completely different
The main purpose of angel investors is to provide financial support. While they might offer advice upon request or connect business owners with key contacts, they are not required to do so, and their level of involvement depends on the needs of the company and the individual angels.
Once venture capitalists are persuaded and have invested their funds, it is their duty to aid in developing a profitable business, and this is where they add value. VCs will help when it comes to establishing the company’s strategic focus and recruiting senior management. They will also be available to advise each CEO, eventually aiding the business in generating more revenue and achieving great success.
- Investment made in types of companies is also different.
Angel investors are specialized in early-stage businesses, early market entries, and late-stage technology development. The angel investor’s funds can make all the difference when it comes to getting a company up and running.
On the other hand, venture capitalists may invest in more mature and early-stage businesses depending on the firm’s focus. A venture capitalist will be eager to invest in a startup with strong growth potential.
- Due Diligence
Due diligence is a topic that has been controversial for angel investors as few angels do almost no due diligence as they aren’t bound to do any, given that it’s their own money. There have been profits in the past when the angel investors have done even the least amount of due diligence.
Venture capitalists need to do more due diligence, given that they have a fiduciary responsibility to their limited partners.
Closing Thoughts
All companies require funding to function, and that being said, funding is especially key for startups’ survival. So, which path should startups follow to get the capital they need? Is it an angel investor or a venture capitalist? There is no exact answer to this question as it depends on what stage of the business you are in.
If the entrepreneur has an idea for a company, then angel investors might be the way to go. Still, if they have already started a company and need additional funding, expertise or contacts, then venture capitalists might be the right answer.