Venture capitalist vs angel investor? Are they the same? If not, which is best for a startup?
Funding for a new or evolving business is essential to support growth and development. If you’re in a position where you need funding, do you seek venture capital vs angel investing? Moreover, what is the difference between a venture capitalist and an angel investor?
The truth is that the lines between angel vs VC are sometimes blurry, and it can be challenging to differentiate between them. In addition, these days, many financing platforms exist to choose from for your startup, but that doesn’t mean they are all good. You’ll come across terms like “angel investor and “seed investor“, as well as “crowdfunding platform” or “family office“, and you will learn more about that in this article.
This guide to whether to get funding from a venture capitalist vs angel investor will demystify the subject. When you are ready to seek financing, you will have a clearer idea of the best source to approach for help. Firstly, let’s find out about angel investors.
What is an Angel Investor?
An angel investor is a person with a high net worth who uses their own money to invest in early-stage businesses. In return, the company gives the angel investor equity in the business. If you have watched Dragon’s Den on TV, it’s the same process. Angel investors work alone or as part of a syndicate with other wealthy individuals they know and trust.
In 2012, the Jumpstart Our Business Startup Act changed the face of small business investment. The wealth restrictions were lowered, which meant anyone could invest in private companies. More people are launching startup businesses today, and “seed funding” has become more prevalent than “angel investing.”
What is Seed Funding?
Seed funding is investing in the critical first stage of financing a new company to help get the business started. Typically, seed funding takes place before a company approaches an angel investor or venture capitalist.
The founder of a new startup may approach friends and family for seed funding and other people who trust them. After securing funding and getting demonstrable results, the entrepreneur may contact an angel investor or venture capitalist firm.
Typically, investors won’t commit to a startup without some proof that the entrepreneur is capable of running a company. Some entrepreneurs self-fund their ideas at this stage but may eventually run out of cash as the business grows. Investors want to see sales figures and data (like patents pending and proof of client deals) to establish a company’s valuation before negotiating equity.
What Does Being an Angel Investor Involve?
Typically, accredited angel investors have a net worth of at least £1 million, not including the value of owned properties. Most investments range from £25,000 to £500,000, depending on whether the business is considered high-risk. Angel investors are generally skilled at assessing risk and may ask for more equity in a startup if the risk is high. It’s a balance of evaluating risk and reward.
Many angel investors are more hands-on than venture capitalists. They may have a place on the board for the startup and be a highly active member of the founding team. Their influence over the startup depends on the level of equity agreed on funding. Though most investment deal percentages range between 10% to 30%. If the angel investor believes the startup is risky and needs a lot of help getting off the ground, they may request more equity.
Angel investors usually have a lot of experience in founding and repairing businesses and enjoy helping a new startup become successful. They are savvy investors who understand that too high a cash contribution can cause more harm than good in the early stages. If a startup experiences rapid growth, the structure and foundations of a company can become unstable. Therefore, some angel investors advise a follow-up investment round once the startup is in a healthy position and ready to expand.
Negotiating With an Angel Investor
You may think that the angel investor holds all the cards, especially if funding is critical for a business to operate on all cylinders. However, angel investors appreciate an entrepreneur who is confident in negotiating terms. For example, if a founder returns the investment in a predetermined period, the angel investor may lower their equity by a small percentage.
Having an angel investor on board does not mean the entrepreneur leaves all the work to them. Anticipate that angel investors want to see verifiable data from the business founder to show they have adopted an active approach. They want to see evidence of success in starting the business from scratch and, for example, successfully getting a new product into the market.
The Pros and Cons of Working With an Angel Investor
It is often easier to get angel investment than VC support, especially if the business does not require significant funding. A niche-specific angel investor can be a godsend for a company, helping bring new products to market and guiding a founder through the pitfalls of early startup issues.
Securing capital from an angel investor is more productive and cost-effective than taking out a bank loan. With the latter, you must start repayments soon after receiving the loan. Plus, the bank can call back the loan anytime they wish without reason. Yes, you give away some equity with an angel investor, but you also get a business mentor and access to connections in your industry. An active “angel” often plays a significant role in growing a business. They are (literally) invested in its success.
It’s vital to work with an angel investor who has an understanding of and contacts in your industry. Most angel investors are committed to helping you make the business grow because they want to see a return on investment as quickly as possible. However, if you choose an individual that doesn’t support and mentor you, it could be tricky if it’s your first startup. Moreover, if the angel investor has poor communication skills or there is a conflict of personalities between you or the team, you could quickly regret your decision for angel investment.
When choosing an angel investor, find someone with verifiable experience who is keen to get involved in the business. Make sure your communication styles are similar. The ideal scenario is to have honest and open conversations and feel confident to have difficult discussions without them turning into a drama.
Is Crowdfunding Considered Angel Investing?
The difference between crowdfunding and angel investing is easy to understand. Angel investors commit their time, experience, connections, and startup capital. They often spend time with the entrepreneur helping to grow the business, introducing potential clients (or other investors) and focusing on getting a return on their investment as quickly as possible.
If you raise funds via crowdfunding, anyone can invest in your company. You may set tangible rewards for different levels, such as merchandise or tokens for a crypto startup. Those who donate money to the crowdfund do not have equity in the business.
So, now you know about angel investors, let’s find out about venture capitalists so you can decide between angel investors vs venture capitalists.
What is a Venture Capitalist?
You understand that an angel investor is a person that invests their capital in a startup. The primary difference between a venture capitalist vs angel investor is that the former is an institution that pools funds for the sole purpose of investing in high-growth businesses. All venture capital companies are different. Some invest in niche-specific industries, such as tech startups. Others focus on geographical locations, such as countries with high-growth potential.
Venture capitalists operate similarly to angel investors in providing capital investment in return for an equity stake in a business. However, venture capitalists are typically more interested in investing in later-stage development once a company has demonstrated market viability and growth potential.
Venture Capital Series? What Does That Mean?
There are three series of venture capital investments, A, B and C. With so many startups, the consensus is that series A is an investment in companies that have achieved successful products to market and show sustainable growth. At this stage, a venture capitalist helps companies ready to expand. The startup may need to do more research and development, improve products or need more marketing exposure.
Unlike angel investors, the level of investment is likely to be higher, sometimes into the millions, for businesses showing rapid growth and successful market adoption. Above all, series B & C are usually bigger deals, hundreds of millions for the right company. For example, if a company is considering expanding internationally.
The Pros and Cons of Working with a Venture Capitalist
The primary benefit of working with a venture capitalist is access to higher funding levels. In addition, VCs are usually well-connected and provide support and mentoring to founders. If you choose an industry-specific VC firm, your assigned mentor can bring significant value to building the business.
The most concerning issue for new founders is losing control of their company. The worst-case scenario is being voted out of your own company if the VC firm has sufficient equity. Such an instance is not uncommon at the late stage of funding, series B or C. For example, Steve Jobs got ousted from Apple.
How to Pitch to Venture Capitalist vs Angel Investors
Before meeting the angel investor vs VC, preparation is vital. At this stage, the investor will assess investment viability. They don’t just focus on the market potential but also on whether you, as the founder, are on the ball.
- Have a business plan: Angel investors or VCs will not take your application seriously if you cannot produce a detailed business plan
- Prepare a good pitch: It doesn’t need to be convoluted or overly long. Focus on crucial measurables, such as achievements to date, product sales, profit and loss. You must provide a clear brief about the allocation of investment funds
- Know your numbers: Never go into a meeting with a potential investor without exact figures for the business and projected profits
- Have a percentage figure in mind: Be as flexible as possible. You don’t want to give away your company. Still, you want an angel or VC to roll up their sleeves and work with you on growing the business. For that, investors will demand more equity
- Be prepared to negotiate: Suppose you don’t want to give away more than 10% of equity, but the angel or VC wants 20%. Clarify what the investor will bring to your business and negotiate a reduction of the equity if you repay by a set time
- Provide financial statements: Data is king
- Have precise financial projections: Be realistic and provide proof for your estimated figures
- Document your market analysis: Demonstrate understanding of your market and audience, including competitors, potential obstacles etc
- Patents: If you have patents or patents pending, take the documentation to the meeting. Be clear about precisely what the patent protects
Prepare your pitch according to what you know about the difference between venture capitalist vs angel investor. Hopefully, you will gain a fantastic ally for building your startup.
Conclusion: Venture Capitalist vs Angel Investor: What’s the Difference?
Depending on the stage of your business development, you can choose between angel vs venture capital to inject the necessary cash. In addition, you will get esential mentorship for taking your startup to the next level.
To sum up, we aren’t financial experts. This post only covers the basics of choosing a venture capitalist vs angel investor. We advise taking professional financial advice before starting your search for the right person for an injection of capital.
You might enjoy reading our article on how to become a venture capitalist. It’s an exciting and varied career with many opportunities with some top VC companies. If you need help with your career move, upload your resume and contact the CB Recruitment team.