The Difference Between Business Angels and Venture Capital Investors
When it comes to raising funds, it can be a tough decision to decide on whether to go with Business Angels or Venture Capital Investors. Although there are many key differences between the two, it should ultimately come down to your business plan and the stage of your start-up or company. Below we have provided insights on both Angel Investors and Venture Capital Investors as well as their differences to guide you in your choice.
What is an Angel Investor?
Angel Investors, typically high net-worth individuals, invest their own personal money into a startup or small business. They assume greater risks in exchange for equity or convertible debt, which sets them apart from other types of investors. They are more inclined to help emerging businesses get off the ground and seek out companies still in the development and research phase with potential for growth.
Angel investors are not beholden to banks or institutions and are, therefore, not bound by traditional concerns of what is viewed as a high-risk business loan. Many angel investors have earned their money through their own entrepreneurship, possessing business knowledge that is helpful to start-ups.
What is a Venture Capitalist?
A Venture Capitalist is an individual or group that invests money into high-risk start-ups, typically on behalf of a risk capital company. VCs have a more structured approach, with a team of investors and analysts supporting potential investments via pooled money from private investors. VCs seek out companies in their early stages with the potential for high growth that have begun to gain some traction and are ready for the next phase.
Like angel investors, a venture capitalist possesses relevant experience, ample connections, and helpful knowledge for start-ups. After a set period, a venture capitalist may even buy out the company or a large number of its shares.
Roles and Responsibility
Angel investors primarily offer financial support, sometimes giving advice or introductions to important contacts although they are not obligated to do so. Their level of involvement depends on the wishes of the company and their own inclinations.
Venture capitalists have a more hands-on role, helping with the establishment of a company’s focus and recruitment of senior management. Once VCs are convinced and thoroughly invested, their role is to build a successful company. They will remain on hand to advise and act as a sounding board.
Equity and Control
The amount of equity asked for by an angel investor can vary, but typically ranges between 5% to 30%; however, it can be smaller or larger depending on the specific scenario. An angel investor mostly receives minimal voting power and advisory actions.
The requested amount of equity for venture capitalists can also vary greatly, with percentages going between 10% to 80%. VCs receive operational voting power due to being more hands-on in start-ups.
Start-Up Selection
Angel investors typically work with early-stage companies with these following traits: high growth potential, market opportunity, early traction, a skilled management team, a path to profitability, an exit strategy, and an investment focus match.
Although the venture capitalist sector is large and diverse, these following traits are generally in start-ups attractive to venture capitalists: an innovative business model or technology, a scalable produce or service, strong market potential, a competitive advantage, an experienced and skilled management team, evidence of traction, a clear path to profitability, the potential for high returns, an exit strategy, and an alignment with investment focus.
Check out our Certified Business Angel Program or the European Super Angels Club and learn everything you need to know about funding from Business Angels or Venture Capitalists and much more!
