What’s the difference between a venture capitalist and an angel investor? Quite a few, as it happens, but for your purposes as an entrepreneur in search of financing for your business, there are four important differences which you need to be aware of.
1) Management/Advisory Participation
Venture capitalists almost invariably take a hands-on approach to their investments and their funding comes with conditions. They’ll usually want one or more seats on your Board of Directors to make sure that their money is being managed wisely and will generally be closely involved with the business operations. Some angel investors will be interested in participating in the business, although less commonly and to a lesser degree than venture capitalists. However, participation from investors isn’t necessarily a bad thing, since investors usually opt for investments where they know the industry and can help your business to grow and achieve your exit strategy.
2) Where The Money Comes From
An angel investor is usually an individual who has the financial resources to make a large investment in a start-up. They’re successful people (or other entrepreneurs like yourself who have built and sold their businesses). The money that they invest is their own and as such, they have a lot more freedom to invest when and where they like. A venture capitalist, by contrast, is investing other people’s money; this may be a pension fund or a group of well to do individuals or even other businesses looking to diversify their holdings. Since the money they’re investing is not their own, they are restrictions on what they can do: they may need to get a certain percentage of return on their investment or invest only in specific industries. However, they also tend to have a lot more to invest than the average angel investor.
Venture capitalists are professionals who make investments as their occupation and generally have a great deal of expertise in a particular industry (or as an investor). On the other hand, an angel investor may be a professional investor or simply a successful person who has taken to investing in startups recreationally.
4) Capital Resources
Perhaps the biggest difference between venture capitalists and angel investors is the amount of money that they tend to invest in any given business. A venture capital firm, for instance, typically invests between 5 and 10 million (and almost always over 1 million), since they’re typically looking for a large return on their investment; 40% is a typical figure. An angel investor can choose to invest as much or as little as they like or can afford, usually somewhere between $50,000 and one million.