CHAPTER EIGHT: Part B – Although both of them are similar in that they will hold private equity from having made investments directly into private companies, there are certain differences between angel investors and venture capitalists. You need to understand these differences to figure out which option is best for your business. Here are major differences between angel investors and venture capitalists:
Angel Investors Vs Venture Capitalists – What’s the Difference
- Angel investors invest mostly as individuals, while venture capitalists are structured companies comprising of several individual investors.
- Angel investors invest their own money into businesses, but venture capitalists invest money contributed by several investors.
- Because they are individuals, angel investors are usually unable or unwilling to fund businesses that require funds above $250,000. Venture capitalists, on the other hand can fund businesses that require millions of dollars, since they are holding funds from several individuals.
- In addition to the invested funds, angel investors usually contribute personal experience and relevant contacts to the growth of businesses they invest in. Some venture capitalists don’t go this far.
- Angel investors may be willing to “hands-off” your business if they have nothing relevant, aside the capital to contribute. But venture capitalists will always require board seats and complex deal terms including the ability to control subsequent financings.
- Angel investors usually require very high ROI because they take very high risks by investing in new businesses that may tank. Venture capitalists usually contribute to already-growing businesses with reduced risk of failure, so they don’t require very high ROI.
- Angel investors tend to believe in the entrepreneur and invest in them as a person. Venture capitalists, being less emotional and more process involved, mainly evaluate deals and make offers.
- Angel investors allow for flexibility in deal structuring and financial decisions; venture capitalists are rigid.
- An angel investor fund businesses for motives beyond financial gains (such as social responsibility and community involvement). A venture capitalist is obligated to maximize investors’ returns and outperform other venture capitalists; in order to attract even more investors.
- Angels tend to avoid follow-up investments out of fear of losing more money should the business fail. Venture capitalists, on the other hand, usually invest additional funds at later stages to assist with growth.
- Angel investors are found in virtually all industries, and they have diversified portfolios. Venture capitalists are involved in limited industries (mostly technology), and they have limited portfolios.