Angel Investors vs Venture Capitalists – Know the Differences

Angel Investors vs Venture Capitalists – Know the Differences

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Rashmi
Rashmi Karan
Manager - Content
Updated on Feb 27, 2023 17:21 IST

Wondering whether to pitch an angel investor or a venture capitalist for your startup? Read on the article to understand the difference between these two types of investors.

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Companies, especially start-ups, aim to seek investors to provide them with financing in exchange for some equity stakes. For many entrepreneurs, it is extremely important to find investors since it is the only way to develop their business projects. There are different types of investors, but currently, two stand out: angel investors and venture capitalists. The article talks about angel investors vs venture capitalists.

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What Are Angel Investors?

An angel investor is an individual investor who provides capital to an early-stage startup company in exchange for equity or convertible debt. Some angel investors also provide mentoring and advice, while others form syndicates and collectively invest in businesses.

Angel investors tend to be less risk-averse than traditional financial institutions. In most cases, they don’t expect their money to be paid back if the business they are financing fails. Entrepreneurs can also benefit from the wealth of industry knowledge and experience these investors bring.

Must Read – What is Finance?

What Are Venture Capitalists?

Venture capitalists are employees of venture capital firms who invest money in other firms, large corporations, and pension funds. They invest other investors’ money in high-risk startups with the potential to grow and gain market share.

Both types of investors assume a calculated risk and expect a high return on the investment. The main difference between angel investors and venture capitalists is that angel investors are a critical source of seed funding, while venture capitalists provide financing for more established startups to help them transition through various growth stages in mergers, acquisitions, or IPOs.

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Angel Investors vs Venture Capitalists

Below are the major differences between angel investors and venture capitalists.

Angel Investors Venture Capitalists
Background  Usually former entrepreneurs. Finance, consulting, or industry experts.
Investment approach Own money investment. Investing a firm/people’s money.
Investment stage Seed and early stage. Initial seed stage to the mezzanine stage that precedes an IPO.
Deal flow  Social networks or angel networks. Business outreach or social networks.
Geographic proximity to investments Usually local. Nationally and internationally.
ROI Important but not the only reason to get motivated to invest. Critical. VCs expect decent returns to run their businesses. 
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Below are some crucial differences between angel investors and venture capitalists based on different criteria.

Investment Amount 

The first difference between angel investors and venture capitalists is their investment amount. According to some estimates, the average investment of angel investors ranges from $200,000 to $300,000. In contrast, venture capital usually goes further, with estimates of around a million dollars.

This difference is quite significant, especially in choosing the one that fits the business goals and the nature of the project. Venture capital is a good option for new companies with large configurations and initial costs with significant potential for expansion. In contrast, angel investors are especially beneficial to small businesses with low startup costs.

Must Read – Venture Capital vs Private Equity – Learn the Differences

Expected Returns

Another important difference between angel investors and venture capitalists is the return rate expected by each investor. On average, a venture capitalist expects a return of 35-40% on the investment. The average return on investment the angel investor expects varies between 5% and 25%.

Role and Involvement

This is one of the biggest differences. Angel investors are individuals looking for a place to invest excess personal capital, and in turn, they ask for a shareholding in the company. The inherent risk of loss is higher, and the investor will always be willing to invest in the startup owners, who are usually ready to give up a part of their share.

In contrast, venture capitalists are not individual investors but companies that provide financing to different startups ranging from food to high-tech companies.

Related – Understanding Issue of Shares with Example

Investment Motivation

Most angel investors make their investments without getting involved or involved in other project matters. However, they contribute whenever required and share their knowledge and experience. Your participation depends on the nature of the business and your interests.

Venture capitalists, by contrast, look for strong products with huge sales potential. Not only this: before investing, they ensure that the company has a capable management team and that the product or service has a competitive advantage.

 With their involvement, they can provide strategic focus, senior management support, large-scale expansion opportunities, and business guidance throughout the process.

Specialization

On the one hand, an angel investor usually specializes in financing startups in their early stages or late technical development or the cost of entering the market. Therefore, the amounts of investments made by them are usually lower. Still, they’re enough to make a difference to a startup that has yet to start.

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How to Pitch Venture Capitalists or Angel Investors?

Before you pitch to a venture capitalist or an angel investor, ensure you perfect your investment pitch. You should know about your business and industry inside out. 

We hope this article helped you understand the concept of Angel Investors vs Venture Capitalists and will further aid you in the financial planning of your business.


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About the Author
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Rashmi Karan
Manager - Content

Rashmi is a postgraduate in Biotechnology with a flair for research-oriented work and has an experience of over 13 years in content creation and social media handling. She has a diversified writing portfolio and aim... Read Full Bio