June 7, 2022

Top 7 differences between angel investors and venture capitalists

Nikhil John
Product Marketing Manager

If you’re in the market to take your startup or business to the next level you’re probably looking for a way to finance this growth. With a lot of options out there for entrepreneurs and business owners to look at, it all boils down to the timing and how you aim to utilise these funds. While the traditional business loan may not appeal or be accessible to all, let’s take a look at the more popular forms of raising funds that are taking over our news feeds. Angel investors and Venture Capitalists seem to be the talk of the town now. From helping companies scale exponentially to making them PR worthy, they’re worth taking a look at. Let’s get started with what they are:

What are Angel Investors?

An Angel investor is an individual who provides capital for a business or startup in exchange for convertible debt or for equity in the company. Angel investors usually support startups or young businesses that are in the initial stages of business, where most investors aren’t ready to back them. Also known as private investors, these individuals have a high net worth. In rare case you may even find them investing in companies for royalty. The funds they provide may be one time investments or could be in instalments.

Angel investors look to invest in the startups that are in the early stages of business. These investments are usually risky in nature but they only represent around 10% of the angel investors portfolio. The reason they invest in such companies is because they’re looking for a higher rate of return than your traditional forms of investment. They usually play a big role in ensuring these early stage companies hit the ground running and they invest more in the capability of the entrepreneur rather than the business itself.

What are Venture Capitalist?

Venture Capital is a form of equity based financing and Venture Capitalists are the ones that provide it. It’s a type of investment provided to startups and small businesses that are expected to have a long term growth potential. Venture Capitalists are firms backed by well off investors, investment banks and other financial institutions. Venture capital may not necessarily be considered a financial aid. In some cases it can be provided in the form of technical and managerial expertise.

VCs are now a very popular option for early stage startups and new companies with an operational experience of under 2 years. It could also be a viable option for companies that lack access to bank loans, capital markets or other debt instruments. This option does however come with a price and that’s losing out on equity in your company. VCs usually take equity as collateral for investing in your company and that translates to them having a say in business decisions.

While it’s arguable that both these options of raising funds are suitable for startups/ businesses in their early stages and they both expect equity in return for the investment, there are clear differences between the two. Let’s get into how they’re different by listing out 

The top 7 differences between angel investors and venture capitalists

  1. Angel investors as defined are mostly high net worth individuals that invest their own money in these businesses, indicating that they operate independently, while Venture Capitalists belong to a company or a firm.
  2. The other difference is in the amount of finances that can be raised by companies through the two options. Angel investors invest far less money in a business in comparison to VCs and range from around $25,000 to $100,000. If angel investors form or join a group the average investment could go up to around $750,000. The average investment from a company of VCs on the other hand is around $7 million.
  3. Angel investors mostly only provide financial aid for the companies they invest in, while VCs will bring more in the form of assistance in terms of managing the business, setting up a team capable of growing the business as well as several other market opportunities.
  4. Angel investors specialise in early stage companies. They finance technical development at the late stage and early market entry. On the other hand VCs invest in early stage and more mature businesses. They will usually float towards companies that show promise and excellent growth potential.
  5. When it comes to supporting the business, angel investors do no more than monetarily help the organisation as these funds are their own and are taking a risk in investing into the capabilities of the founding team. The VCs on the other hand have a more hands on approach as they’re investing on behalf of the firm and must keep in mind the best interest of their trustees
  6. While Angel investors do take equity in return for their investments they rarely end up on the board of directors. VCs on the other hand require you to set up a board of directors which entails that the company is technically signing off some of its decision making capabilities to the VCs.
  7. Angel investors may never really have a say in the decision making aspects of your business. The most they can do is advise the management in certain aspects. VCs on the other hand play a more crucial role in running your business and depending on the stake they hold in your company can also influence many of the crucial business decisions in terms of hiring and recruitment to strategic plans. They do take away from the owners and founders their total control they would otherwise have on their business

If you’ve already taken your pick on who you want to proceed with, it’s best we get into how you can go about searching for them. First off let’s take a look at 

How to find an angel investor

While the internet may provide you a list of sites and forums for you to register on, the fact is that you should be aware of who you’re looking for. Preferable someone in your own domain/industry who will understand your business and improve your chances of raising some funds.

Out of all the sites out there, Angel List is by far the most popular place to look for new hires as well as Angel investors. But the best way to find a suitable investor is through networking and evangelising your business. The chances are your network will hold the answer to your investment needs. Referrals will play a huge role so networking properly could make or break your chances of bagging a round of funding.

Here’s a few things you should keep in mind while looking for an investor:

  • Look for an investor with experience in your industry, not only will these folks be more interested in hearing you, they may also come in handy at a later stage of the business, thanks to their experience in the industry.
  • Look for an investor with good financial stability. You’re looking for someone with a high net worth, who won’t hesitate to write you a cheque for the amount you need. Look for an investor who isn’t looking to get his money back in the very near future. This will save you the trouble of getting involved in an agreement that could sabotage your business.
  • Look for a mentor in them. If you’re a first time entrepreneur, it would be in your best interest to look for an investor who can bring some guidance to help you wade through the strange stages of a startup business. Not only will they be likely to help you in terms of guidance, but if they’re vested in your company, they could even pull you out of a sticky situation.

Finding an angel investment isn’t an easy process and can be time consuming. So plan ahead and ensure you start looking well in advance so as to avoid putting your business in a difficult situation.

How to find Venture Capital Investors? 

Well the process isn’t very different from looking out for Angel Investors. There are quite a few of them so you can start off by exploring their resources online. Venture Capitalists get a tonne of requests and they only invest in a handful of them. So there’s more than just filling an application involved here.

Here’s a few tips to help you out with the process of finding venture capital investors:

  • Use the Social Platforms to follow them and participate in their discussion. Follow them on Twitter and Linkedin and join in on the conversation.
  • Meet them at networking events, there’s no better way to catch their attention than to get in front of them face to face. Use the local meetups and industry events to broaden your network.
  • Referrals from your existing network and from other companies that are VC funded could help you get in front of them.

The rest is pretty much the same. Remember to look for VCs that have your company’s best interest in mind. VCs that invest in companies like yours could improve your chances of raising funds. VCs are far more time consuming and harder to come by so plan in advance to ensure your business does not take the brunt of it all.

One more aspect you might want to take a look at before you make your decision to raise funds is weighing out the advantages and disadvantages of both these types of funding.

Advantages of working with Angel Investors:

Ideal For Startups:  This is an ideal form of raising finance for startups/ businesses in the early stages. Angel investors are always on the lookout for investment opportunities in new startups that are in the development phase or the ones that ready to enter into the market

Paperwork is Less: While you will need to draft a suitable business plan, along with targets, projections and a pitch, they tend to be less tedious than a business loan or VCs. APart from this you may also need a convertible note which is meant to finalise the investment. This is technically a short term debt that has an interest rate or a discount and has a valuation cap and a maturity rate.

No Monthly Payments: Because the angel funding isn’t a loan there are no monthly payments involved. This can help your short term cash flow since you won’t be adding monthly payments to it. Angel investors get paid eventually, either when an acquisition takes place  or when more funding is raised, based on the terms that are set.

Additional Support: Apart from the funds and provided you’ve chosen the right ANgel investor to back you up. You could also gain additional help in the form of knowledge from these investors. Their industry knowledge could be crucial for you to wade through difficult situations in the future.

Networking opportunities: Angel investors can get you in front of potential customers, additionally they can introduce you to startups they’ve supported as well to help you build strong partnerships.

Assistance for future funding: It's in the angel investors best interest to ensure your startup succeeds because their payout is tied to either your company raising funds or being acquired. They will help you get in front of the right investors in the later stages of your business.

Disadvantages of Working with Angel Investors:

Availability is based on who you know:  Even though there are multiple sites and forums to get in front of Angel Investors, your best chance of raising funds is through a referral from your network. Angel Investors go through many applications and the best way to improve your chances is by being referred through a reputable source.

Terms can be hazy and funding could be slow: Since angel investment is less formal than other types of funding and both parties want to get the best out of it, the decision making process can involve a lot of back and forth that may never lead to a finalised agreement. Try your best to get the agreement drafted in the most detailed manner as you push to close the deal.

An option to convert debt to equity:  Angel Investors usually receive a convertible debt at a premium of 20%. At the company’s next valuation they can convert this debt to equity. This means the more times you raise funds the more equity you give away. In some cases original owners become minority owners thanks to giving away their equity.

Rapid growth is expected: Investors are always looking for a quick return on their investment and the case is the same with angel investors. This means the pressure on your company to grow will be high even if it doesn’t align with your long term plans for the business.

Founder control is reduced: With equity slipping out of your hand with every round of funding you raise, you stand the risk of losing control over decision making in the business. While it’s great to have assistance in the form of advice from investors, on the flip side it could also lead to some unfavourable decisions being taken for the business that may not align with your expectations.

Support and Guidance may be limited:  With Angel investors, guidance to the business is only guaranteed in the form of monetary benefit and depending on the investors credentials may or may not be available in assisting you in running the business. Hence it is crucial to pick your investors wisely.

Advantages of working with Venture Capitalists:

  • Raise more money: Compared to Angel Investors, the upper hand with VCs is that you could potentially raise a larger round of funding which will definitely come in handy when you’re looking at boosting your growth. Angel investments are often considered a precursor to VCs, which is clearly visible in the way most companies raise funds these days. While bootstrapping your business is ideal, taking a risk with VCs could give you an advantage over the competition. 
  • Pay it when you make it: VCs invest in your company because they get a share of your equity in your company that they can cash in when your company is acquired or if you raise an IPO. They understand that their returns are long term and that means no monthly payments. This gives you the time and piece of mind to focus on  growing your business, rather than worry about payment deadlines.
  • Your Assets aren’t collateral:  Since equity is the only collateral you’re trading with VCs, your assets remain untouched. So you need not worry about pledging your home like you normally would with a bank loan.
  • The benefit is more than monetary:  VCs aren’t just known for the money they bring in. Having worked with several startups and their expertise in business, they bring more to the table in the form of experience. Having them on your board ensures that they fill in the gaps within your business and also assist you in taking some crucial business decisions that may be new to you. Having their support in an unfamiliar situation is always a benefit.
  • Networking opportunities:  Think of the number of companies that VCs work with. That list alone should take you a while to exhaustively network with. As an entrepreneur, building a personal network is a crucial task, but is also time consuming. Spend too much time networking and your business takes a hit. VCs spend 50% of their time broadening their network to help the companies they invest in. They could put you in front of potential customers, help you build partnerships with complementing businesses or even put you in front of your next investor.
  • Build your workforce: Backed by a VC, your company stands a better chance of recruiting top tier talent as compared to a bootstrapped business. As a candidate, the potential of the company as well as the financial and career growth seem more appealing. To add to it references from the VC could land you the right person for that vacant position. 
  • Publicity: A public relations department and lots of media connections are synonyms with VCs. The publicity that this brings could be a game changer for your business, putting you in front of prospects, partners, employees and investors.
  • Your next round of funding: If it’s the first round of VC funding you're picking up, be rest assured that the VC who invests in your business is aiming to increase the valuation of your company. Why? Because that increases their returns on the initial investment. It’s only in their best interest to watch you succeed!

Disadvantages of working with Venture Capitalists:

  • Funding is scarce: While the lure of the VCs is enticing, like most winning lottery tickets, they are hard to come by. VCs only fund 4 out of every 1000 companies that drop in their applications and unlike lotteries it's not luck that will get you there. While a great business idea and a rapidly growing business may improve your chances, it will definitely not guarantee it.
  • Reduced Ownership: Equity is the only collateral you can put up for raising a VC round. That means you're signing away a portion of the control you have in the business. If that wasn’t enough, companies do end up in a position where they’ve signed away more than 50% of the stake in the business. If this ever happens you’ll potentially lose management control. 
  • Time consuming: Looking for the right investors is a time consuming process. So the process of searching should start months in advance. This will ensure you’re still focused on growing the business while you raise the necessary funds as well as avoid a cash burnout.
  • Venture Financing is Expensive: While you might enjoy skipping out on monthly repayments and the added interest, in the long run, venture financing will cost you more than a business loan. The cost based on the equity will add up eventually when it’s time to sell your business. 
  • Board of Directors:  Setting up a board of directors is probably the first thing you’ll have to do to receive venture capital financing. This will involve a tight internal restructure and usually done to ensure transparency is maintained. On the flip side this will eat away the control you have in your own business.
  • Rapid Growth is required: VCs expect rapid growth from the companies that they invest in. While this may not be ideal for the business or align with your growth plans, it is a prerequisite. If you aren’t planning for an IPO or an acquisition in the near future, you’re probably better off without VC funding. The pressure to push your business to perform is a certainty.

If you’re still confused and uncertain about how you should go about raising funds for your business, there are alternatives to both Angel Investors and VCs. Subscription Based Funding is a relatively newer form of financing that has gained support thanks to the flexibility it offers founders in today’s competitive environment . BridgeUp is a subscription based funding platform that provides instant upfront capital to businesses with recurring revenues. Find out how your company can raise funds through subscription based financing