Business Angels or Venture Capital? | Equidam (2024)

FAQs

Business Angels or Venture Capital? | Equidam? ›

Business angels fill the 'gap' between friends & family and venture capital. They typically invest in early-stage business and startups, which also means that they face a higher risk than venture capitalists. The latter are less interested in early-stage businesses and prefer more established businesses.

Venture capital firms make an average return of 57% per year before the company is sold. However, VC investments are very volatile, so this figure has a standard deviation of about 100% (compared to 10% for most S&P-500 stocks). Meanwhile, angel investors see anywhere between 20-40% rate of return each year.

Unlike VCs who can borrow from institutions to raise funds, angel investors typically use their own wealth to finance entrepreneurs, participating in the growth without holding direct operational control. ALSO READ: How to Elevate Your Business Performance With Financial Analysis and Management?

High expectations: VC firms often expect high returns on their investments and may pressure startups to pursue rapid growth at the expense of other important goals, such as social impact or sustainability.

Why do you want a job in VC? To answer this question, you should demonstrate a clear understanding of the industry and explain how your skills and experiences align with the demands of the role. You can also talk about your passion for innovation and your interest in startups.

Investment Profile

The effective internal rate of return for a successful portfolio for angel investors is about 22%, according to one study. 4 This may look good to investors and too expensive to entrepreneurs, but other sources of financing are not usually available for such business ventures.

Differences. Business angels are individuals, often successful business people, who are using their own funds to invest in businesses they like, whereas venture capitalists manage the pooled money of others in a professionally-managed fund.

An angel investor is an individual who invests in startups usually in exchange for an agreed-upon percentage of ownership in the company. So, while by definition these Shark Tank hosts are, in fact, angel investors, they look and act differently than the angel investors who invest beyond the tank.

Loss of control

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.

In exchange for investing a certain amount of funding, angel investors receive a minority ownership stake in the company. This proportion is typically no larger than 20 to 30 percent across all investors, since the founders need to retain majority ownership and also reserve some shares for employee stock options.

Why avoid venture capital? ›

Minority ownership status.

Depending on the size of the VC firm's stake in your company, which could be more than 50%, you could lose management control. Essentially, you could be giving up ownership of your own business.

Venture capital provides funding to new businesses that do not have enough cash flow to take on debts. This arrangement can be mutually beneficial because businesses get the capital they need to bootstrap their operations, and investors gain equity in promising companies.

Investing in venture capital funds diversifies some of the risks but the harsh reality is that 80% or 90% of companies funded by venture capital will not make it to the initial public offering (IPO) stage.

For VC, your strengths should include points like “communication/presentation skills,” “networking ability,” and “being able to update your views quickly” (i.e., strong opinions, loosely held).

To stand out in the interview, understanding your unique blend of professional experience, personal background, and passions – your “sweet spot” – is key. VC interviews usually hit 1 or more of these common question categories – About your background, investment thesis, and deal flow sources.

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.

Advantages of angel investors

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.

One of the biggest risks of raising money from angel investors is that you could end up giving up too much equity in your company. Remember, angels are investing their own money, so they're going to want a significant ownership stake in your business.

Another key difference between the two is venture capital “typically involves higher risk but offers the potential for substantial returns,” says Zhao. In comparison, private equity “usually involves lower risk compared to VC investments but may offer more modest returns.”