Angel investors and venture capitalists are key investors in startups that enable high rates of growth. Raising capital from these investors is no easy task. Both of these investors typically work with high-growth companies that are looking to disrupt industries with groundbreaking technology. There are significant differences between the two investors. Understanding the differences between venture capitalists and angel investors can help entrepreneurs decide who to target when raising capital for their company.
Venture Capitalist and Angel Investor Differences
Venture capitalists and angel investors have the same overall goal. Their joint goal is to make money on the capital that they invest in startup companies. Even though venture capitalists and angel investors have the same overall goal, there are significant differences between the two investor types. These differences can help entrepreneurs decide if they want to receive funding from angel investors, venture capitalists, or both.
Solo vs Fund
One of the main differences between venture capitalists and angel investors is the number of investors that are involved. Angel investors are individuals, while venture capitalists are funds composed of multiple investors. Accepting investment from an individual versus an entire organization can have impacts on how your startup operates and long-term growth.
Angel investors are individuals who invest their personal capital in business ventures and are accredited, investors. Angel investors are also known as business angels. These investors are high-net-worth individuals who typically operate by themselves. However, there are angel investor funds and groups. These funds and groups pool their capital and resources together to invest in businesses.
Venture capitalists are a group of professional investors that raise capital to create funds that invest in certain technologies, areas, or industries. Venture capital firms employ multiple people to assess potential investment opportunities. These individuals help analyze startup companies and make the best investment choice based on potential risk and gain.
Recently, there has been the rise of the solo venture capitalist. This investor raises outside capital to invest in startup companies, but the investment decision is only made by one individual. This can be beneficial as solo VCs can make decisions faster than traditional venture capital firms. Some startups also would rather work with an individual and their expertise in a certain industry or technology.
Amount of Capital Invested
The amount of capital that a startup raises can directly affect the startup’s ability to grow quickly. Startups typically attempt to raise as much capital as possible when they raise money. Angel investors and venture capitalists invest different amounts of capital in startups.
Angel investors typically invest their own money, which means that the amount of capital will be less than a VC firm. Angel investor groups may invest more capital in startups. Their collective wealth can help them participate in startup fundraising rounds that they would not be able to invest in individually.
Venture capital firms want startups to grow as quickly as possible. For this reason, and many others, they invest more capital in startups. This capital allows startups to grow quickly and disrupt the markets they operate in. The average venture capital investment has been increasing over the last decade or so. In 2020, the median deal size of late-stage startups was $9.9 million. This amount increased from $8 million in 2019.
Stage of Investment
Startups need to raise money as they continue to grow. The earlier that an investor puts capital in a startup, the more likely that they will lose the capital. This risk attracts different types of investors. Angel investors and venture capitalists invest in businesses at different stages of their lifecycle.
Angel investors will typically invest in a startup much earlier than venture capitalists. This provides entrepreneurs with valuable sources of capital early on, as many other investors will not take a chance on their startup. Angel investors will invest in the team and market potential of the company, rather than proven sales.
Startups usually have a track record of market fit and sales before a venture capitalist even begins to look at investing in their company. However, some venture capital funds are looking to invest earlier in startups. Certain startups can raise capital from both angel investors and venture capitalists before they even launch. These companies are typically founded by experienced entrepreneurs who have a proven track record of creating profitable companies.
Access to Resources
In the past, startups only expected capital from their investors. This has changed as investors expect more from the businesses that they invest in and they want to help startups succeed. Startups can expect that angel investors and venture capital firms will provide more than just capital when they accept investment.
Investors can provide more resources to startups, but the level of resources depends on the investor. As angel investors are just individuals, they will not have access to a massive amount of resources. Angel investors can provide mentorship and networking to the startups that they invest in. Some angel investors will work at the startup they invest in. Angel investor groups may have access to more resources than just an individual angel investor.
Venture capital firms will typically have access to more resources as compared to angel investors. VC firms can help startups in other ways other than financing. Potential customers may have relationships with the venture capitalist firm or other companies that the firm has invested in. VC firms can then connect you with these companies and potential sales can result from these relationships.
When making strategic business decisions VC firms can provide valuable advice to startups. This advice can help your business navigate the industry you operate in. Venture capitalists have access to a wide network of talented individuals and companies. Startups can tap into this network to hire talented employees and set their businesses up for long-term growth. VC firms are helpful for more than just capital.
Amount of Input
When an investor puts capital into your startup they gain some say in what decisions are made. As equity owners, they have the right to have some input on what goes on in a startup company. The amount of say an investor depends on the amount of capital invested as well as the type of investment. This could be a benefit or determinant for a startup.
Angel investors typically do not have as much input as venture capitalists. Angel investors could be completely hands-off investors. As individual investors, they may not have the time and resources to dedicate to contributing to their investment companies. Angel investors usually have more of an advisory role. There are angel investors who take active positions in startups that they have invested in.
Venture capital firms have much more power in a startup that they invest in. Entrepreneurs should fully understand the role that a VC firm will play in their decision-making before accepting investment. VC firms have experience working with startups and can help navigate some of the tricky business decisions that have to be made early on.
Investors want to make sure that their capital is not wasted. Venture capital firms are investing earlier in startups than before, as they want more say in the early decisions that are vital to a company’s long-term success. Venture capital firms may require a set on your board of directors. In some scenarios, founders could be ousted from their company by the venture capital firm if they are not satisfied with company performance.
Level of Due Diligence
When investors are deciding whether to invest in a startup they often perform due diligence. This task involves examining the operations, technology, and team of the startup, as well as investigating the market and industry that the startup operates in. This process can take anywhere from a few days to a few months.
Startups should be prepared to handle all requests for information from investors. The level of due diligence that is performed by investors can depend on the type of investor and specific type of investment. Venture capitalists are likely to spend more time and money on due diligence than angel investors.
Angel investors are not typically bound to perform due diligence, as the money that they are invested in their own. Since angel investors are investing earlier in the business, due diligence typically focuses on the team and market opportunities.
It is not always in the best interest of angel investors to perform little to no due diligence. Some research has shown that if angel investors perform at least 20 hours of due diligence, they are five times more likely to see a positive return on their investment.
Unlike angel investors, VC firms have to perform due diligence on their investments. Venture capitalists have a fiduciary responsibility to their limited partners, which entails performing due diligence on the startups they invest in. As a result, due diligence takes longer for a VC firm than it would be an angel investor.
Venture capitalists report that they spend an average of 118 hours on due diligence before investing their capital. This could be frustrating for startups that are in desperate need of capital to continue operating. VC firms can spend tens of thousands, if not hundreds of thousands performing due diligence on their potential investments.
The Length Of Investment
Investors are looking to get returns on their invested capital as quickly as possible. Venture capitalists and angel investors expect that their capital will be tied up in a startup for multiple years. It takes time for a startup to build to a point where investors can expect a return, such as an IPO or acquisition. The investment period can vary widely depending on several factors.
The amount of time that a venture capitalist and angel investor hold their invested capital in startups varies. Typically, angel investors average investment length is shorter than venture capital investments. A study performed in the United Kingdom by Mason and Harrison found that the average holding time for angel investors was four years.
Venture capital funds typically invest capital in a period of 2-3 years and are expected to return all capital invested within 10 years. A study found that the length of time between receiving initial venture capital investment and the IPO of the startup was 5.7 years. Series A funding usually results in a longer investment period in startups as compared to subsequent investments.
Is a Venture Capitalist or Angel Investor Better for my Startup?
Startup founders should carefully consider which type of investor is better for their business. Deciding whether a venture capitalist or angel investor is better for your business is not always a straightforward task. These are some questions you should ask yourself when looking at sources of capital.
Where is your Startup?
Understanding the current state of your startup can help you decide who you should raise capital from. The current state of your business can help dictate if you can raise capital from certain investors. For example, If your business is pre-revenue, you may have difficulty raising capital from venture capitalists.
What are my Needs?
Understanding both your capital requirements and operating requirements can help you decide which investor is right for your business. Angel investors are great for businesses that are not quite ready to rapidly scale their business.
If you are in a position to raise a significant amount of capital then a venture capital firm may be your best choice. Venture capital is great for companies that are looking to scale up quickly. The massive influx of capital can help you quickly grow your business.
How Much Control and Equity are You Willing to Give Up?
Giving up equity and control in your company can be difficult for some entrepreneurs. Many founders are hesitant to give up control of their business. If you want to maintain more control over your business, you may want to avoid venture capital funding. Angel investors can give your startup more autonomy when it comes to decision-making.
Raising capital is difficult for many entrepreneurs. Fundraising can help your business grow and speed up your time to market. Understanding where your startup is can help you decide whether you should target venture capitalists or angel investors when going to raise money.
Looking to raise a fundraising round? Sign up for one of our info sessions to learn more about the Newchip accelerator!