These two types of investors are different in several ways, but four differences between angel investors and venture capitalists are particularly meaningful for entrepreneurs.
Degree of Participation in Management or in an Advisory Capacity
Almost every venture capitalist that invests in a startup company will insist on making funding contingent on holding at least one seat on the company’s Board of Directors. The Board is ultimately responsible for the company’s overall operation and utilization of investor funds. Typically, a company’s directors are closely involved in business operations. Not many angel investors require this level of direct participation in the management of the company. Requiring the company to assign one or more Board seats to an angel investor is always possible, but it is much less common than with a venture capitalist. Investor participation in management is normally a benefit to the company – investors tend to fund companies that operate in industries where they have expertise. They then use their expertise to advise and help the company.
The Source of the Funds
Most angel investors are wealthy people looking for additional ways to increase their wealth. Many are entrepreneurs who have sold companies, while others are successful professionals. As a general rule, the capital provided by angel investors comes from their personal wealth or the wealth of their families. As a result, angel investors are able to make investments as and when they deem appropriate. In contrast, the source of funds from venture capitalists typically involves someone else’s money. For example, a group of wealthy families or a pension fund might engage a venture capitalist to invest their funds in specified ways. This usually means two things: a venture capitalist often has more money to invest than an angel investor; and venture capitalists operate under a set of restrictions and requirements that must be satisfied before funding can occur. For example, a venture capitalist might be restricted to investing only in specified industries, or the investment must provide a specified level of return.
Amateur Investors vs. the Professionals
Their comparative level of professionalism also distinguishes the two types of investors. Venture capitalists are professional investors their job is investing in companies. Venture capital firms are choosy about their members. Some angel investors are just as experienced and professional as venture capitalists, but others are more casual and invest merely as a hobby.
Amount of Funding
The potential size of the investment may be the most obvious difference between the two types of investors. Angel investors usually invest much smaller sums than venture capitalists. Funding from an angel investor typically involves $50,000 to $1,000,000, but venture capital funding generally falls somewhere between $5,000,000 and $10,000,000, with a $2,000,000 minimum. Venture capitalists seek a strong return (40%, for example) on a sizable investment, but they prefer up to a 100% return on a much smaller, angel-sized investment.
Peter