In recent times, angel investors and venture capitalists are not restricted to investing in tried and tested business models in India anymore. Rather, they are looking to invest in disruptive and innovative business ideas and models. They are increasingly becoming comfortable with the idea of investing in startups that are in the pre-revenue stage . Let us learn more about the difference between Angel Investors and Venture Capitalists .
Venture capitalists and angel investors are two essential components of any startup funding business. When a startup business requires financial help, the angel investors invest their own money in the company. They offer money at an early formation in exchange for convertible equity or debt. On the contrary, venture capitalists also play a crucial role in providing financial support to companies.
As an entrepreneur, you will come across many new terms while deciding how to fund your business. The ‘hot’ way to raise money nowadays, particularly if your idea is new, is to raise funds from VCs or angels in exchange for equity. But how do these companies or individuals differ from each other? Let’s find out:
Table of Contents
What Is an Angel Investor?
Angel investors are high net worth individuals keen on investing in new startup business. Typically, they will be part of the start-up ecosystem working a regular job or running a venture.
What Is a Venture Capitalist?
Venture Capitalists (VCs), on the other hand, are professionals working with a firm that deploys funds it raises from HNIs and others.
Timing of investment: Angels are typically the first investor offering seed capital to a company. They are less likely to participate in future rounds. VCs, on the other hand, are more likely to participate in companies looking for larger sums.
Due Diligence: Angels work on their own or as part of a team of angels. They don’t have professional help and may not be experienced in all aspects of business. For this reason, they may not be very thorough while making their investment. VCs, on the other hand, may spend a lot of money doing an audit of your company, given that they have to answer to partners in their firm.
Board Involvement: Angels will always have a seat on the board initially; if they have invested as a group, one of them will take this seat. However, once a VC invests, the angel may retire from the board entirely.
Expectation of Returns: Angels and VCs are both major risk takers in that the majority of the businesses they invest in are likely to fail early on. For this reason, the investments that deliver are expected to give high returns (typically 10x or more).
Startup Fundraising in India – When beginning a startup, you should know which one you should turn up when raising funds for your company. Whether you need angel investors or venture capitalists depends on the type of business you want to commence. Venture capitalists are employees that take money from people and invest them in companies.
Venture Capitalists vs. Angel Investors
So, what distinguishes angel investors from venture capitalists? If you’ve read this far, you’ve probably figured out a few things:
Angel investors put up less money than venture capitalists.
Venture capitalists demand more equity in a company than angel investors.
Angel investors, as opposed to venture capitalists, fund younger, less established businesses.
Venture capitalists seek a higher rate of return on investment than angel investors.
Angel investors work with and mentor business owners more than venture capitalists.
There are, of course, some exceptions. There are probably venture capitalists who enjoy nothing more than mentoring business owners, and there are probably angel investors who don’t want to get too involved with the business owners in whom they invest.
But, for the most part, the distinctions listed above are correct. As a result, it’s easy to see why angel investors are dubbed ‘angels, ‘ whereas the venture capital industry is frequently derided.
However, both angel financing and venture capital can be a valuable source of funding for startups.
Conclusion
It all depends on whether you want to attract angel investors or venture capitalists. Business owners who have been there and done that tell us the process differs slightly between the two. Hope , the above article helps you understand angel investors and venture capitalists better.
FAQ
Why are angel investors preferred over VC?
Angel investors are often preferred over venture capitalists because they provide quicker access to capital without the stringent requirements and due diligence of VCs. Angels offer more personalised guidance and mentorship, making them attractive for startups seeking not just funds but also valuable expertise and networking opportunities.
Are Shark Tank angel investors or venture capitalists?
The investors on the TV show 'Shark Tank' are typically considered angel investors. While some may have elements of venture capitalists, the show's format aligns more with angel investing, where individual investors make equity deals with entrepreneurs in exchange for funding and mentorship.
What is the main difference between an angel investor and a crowdfund investor?
The primary difference between an angel investor and a crowdfunding investor lies in the scale and approach. Angel investors are typically individuals who invest their own money in startups, offering mentorship. Crowdfunding investors, on the other hand, contribute smaller amounts collectively through online platforms, with no direct mentorship involvement.
Venture capitalists can help your company achieve its ambitious growth goals with big-ticket investments. When you're looking to network like no tomorrow. While angel investors are usually well-connected, VC firms naturally have more partners and resources to connect you with to grow your team and customer base.
Angel investors typically provide funding at an earlier stage than other investors, such as VC firms. This means that angel investors typically have a greater appetite for risk.
The investors on the TV show 'Shark Tank' are typically considered angel investors. While some may have elements of venture capitalists, the show's format aligns more with angel investing, where individual investors make equity deals with entrepreneurs in exchange for funding and mentorship.
Angel investors are generally more eager to place a big bet on a startup with an interesting idea, whereas a VC firm will want to see growth potential. On average, VC firms will invest a larger amount of money than angel investors, but VC investors will also get a higher equity stake in the company.
Angel investors often have a longer investment horizon and can withdraw their money through an initial public offering (IPO), merger or acquisition. On the other hand, VCs typically sell their investments within five to seven years via IPO or acquisition.
The primary disadvantage of the business angel funding model is that business owners commonly give away between 10% and 50% of their business start-up in exchange for capital. After investing their money in a business start-up, most business angels take a proactive approach to running the business.
Funding source: Angel investors invest their own personal capital; venture capitalist firms typically invest other people's money. VC firms typically package their investments into funds, which are placed with institutional and high-net-worth investors such as pensions, endowments, foundations, and large family trusts.
Less risk: When you receive funding from an angel investor, there's typically less risk than if you take out a small business loan. Unlike loans, you're not responsible for paying back the funding from an angel investor because they receive equity in exchange for financing.
These are the types of businesses that angel investors like the Dragons, and venture capitalists (VCs) invest in. The main difference between angels and VCs is that angels invest with their own money and VCs invest with other people's money.
Angel investing is usually reserved for established businesses beyond the startup phase. These companies have shown promise for profits, but still need capital to develop products or grow.
Dividends are payments that angel investors receive from the company in return for their equity stake. The amount of dividends that an angel investor receives will depend on the company's profitability and the angel's equity stake in the company.
They provide you with the money you need to get going and, in exchange, they get an ownership stake in the business. If your startup takes off, then you both reap the financial rewards. If the business fails, the angel investor doesn't expect you to pay them back.
An angel investor may provide capital in exchange for equity (stock in the company) or convertible debt, which is a loan that can be converted to equity at a later date. For example, a company that's valued at $1 million might sell 20% of its equity, worth $200,000, to an angel investor or an angel group.
Venture capitalists make money from the carried interest of their investments, as well as management fees. Most VC firms collect about 20% of the profits from the private equity fund, while the rest goes to their limited partners. General partners may also collect an additional 2% fee.
Funding source: Angel investors invest their own personal capital; venture capitalist firms typically invest other people's money. VC firms typically package their investments into funds, which are placed with institutional and high-net-worth investors such as pensions, endowments, foundations, and large family trusts.
For the entrepreneur, an angel investor provides a much-needed lifeline that is not available through more conventional funding sources. For the angel investor, involvement in early-stage startups has big risks but the potential for big rewards, including personal participation in an innovative project.
Several articles and research papers have been published on the PME and the comparison of VC versus public stock performance. These studies often show that top-tier Venture Capital funds outperform public markets, while the median or average VC fund may underperform.
Because Angels are investing early, they are taking a higher risk and may require larger equity, a board seat, a discount on additional shares in future rounds, and/or convertible note terms. Their checks may also come a bit quicker to you because they are investing their personal money.
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