Venture capitalists work for companies that invest clients’ funds into other companies. On the other hand, angel investors are wealthy individuals (or groups of people) investing their own funds in businesses. That’s the main difference between the two concepts. Now, let’s get into the details.
Definition of Venture Capital
VC is funding invested in small businesses and startups. These are usually high-risk, since there is great room for growth, but also a distinct possibility of loss. Startups looking to scale fast and big will find venture capital an outstanding option. The startup must also be prepared to grow because investments are usually substantial.
In contrast to getting a loan, when you receive venture capital, you have no obligation to pay it back. So, you don’t face this risk if your business goes under.
Who are Venture Capitalists?
Venture capitalists have good connections with other companies and a great deal of institutional knowledge. This is very helpful to startups and other investors. If you choose to work with a venture capitalist, it is important to know they will always expect a return on their investment. This means you need to plan an IPO, acquisition, or another exit. If that’s not something you want, VC might not be the right option. Moreover, when providing funding, venture capitalists expect equity in your small business or startup in return. This means you won’t own 100% of it if you choose to bring venture capital on.
In line with their expectations, venture capitalists target sectors or industries that are more likely to generate massive returns. Many of their initiatives center on technology companies for this reason. Venture capitalists profit when the company they invested in is sold or when the company is listed on an exchange (going public).
Angel Investors: High-Net-Worth Individuals
Angel investors invest in new startups early on, typically in return for equity or convertible debt. Moreover, they provide support in the stage between a startup’s later capital needs and its initial financing needs.
Typically, the funding invested by angel investors comes from different sources. They may have made a big profit in a given industry or sold their own startup, or they might have inherited it.
You don’t need to be accredited to be an angel investor to provide funding, but it helps. In fact, most of them are. To be accredited, you need to have earned a minimum of $200,000 per annum in the last two years and expect to make that much again. Alternatively, you must prove a net worth exceeding $1 million, either on your own or with your spouse.
Angel investors are often more willing than banks and other conventional financial institutions to take risks. As a startup founder working with an angel investor, you’re taking a smaller risk. This is because you don’t need to pay their investment back if your company goes under.
An angel investor can help your startup grow quickly. Usually, they have a lot of business experience and are quite knowledgeable. This is a major advantage for startup founders, who may be inexperienced. As for disadvantages, you’ll need to relinquish some control over your company if you agree to cooperate with the investor.