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What’s the difference between Venture Capital & Angel Investment?

Most entrepreneurs are aware that securing investments in their companies could be essential to the short-term growth and long-term success of their venture. It can often be confusing to know which investment type might work best for an entrepreneur and business. The question of venture capitalist versus angel investor often arises.

Venture capital and angel investments offer excellent options to startup businesses. Outside of choices like securing a bank loan or public offerings, these two investment possibilities are common alternatives for businesses in need of funding. While the two options are similar in many ways, they differ in a few key areas. Understanding the differences is vital to making the right choice.

Venture Capitalist Firms

What’s at stake?

An article in Forbes explains that a venture capital firm makes its money through management fees (a percentage of the amount of capital that they have under management) and carried interest (a percentage of the profits of the business).

Investor Involvement

Venture capitalists are often trusted advisors to entrepreneurs and use their connections to build a customer base or help the businesses in their portfolio overcome obstacles. Also, many venture capitalist firms ask for board involvement, either in the form of a director seat or as an observer.

In short, venture capitalists usually work with a firm and expect to be involved in the operations and growth decisions of a business. Entrepreneurs can usually expect a larger investment from venture capitalists than they can from angel investors.

Angel Investors

What’s at stake?

A business angel gives an entrepreneur money in exchange for a percentage of equity in his or her business. According to Entrepreneur, most angel investors must meet the Securities Exchange Commission’s definition of an accredited investor, which means they have a net worth of $1,000,000 or more and make at least $200,000 dollars a year.

Entrepreneurstates that angel investments usually are around $600,000. Business.com quotes most business angels as investing between $25,000 and $100,000 versus an average $7 million dollar investment from venture capital firms.

Investor Involvement

The level of involvement of an angel investor is different than that of a venture capitalist. They are primarily there to offer the financial support to get a business off the ground. While some simply provide the investment and hope for a return, others do become interested in the day-to-day operations of the business, especially if they have expertise in the area. Still, they are not obligated to be involved so support and mentorship may vary between investors depending on their portfolios. A popular angel investor is Mark Cuban who, according to a contributed piece in Forbes, had 110 investments in 2018.

To sum up, angel investors offer a lump sum of money in exchange for equity, usually before a company proves itself in the market. While angel investors often offer less of an investment than venture capitalists, they are not as involved in the direction of the business, leaving that to the founders.

Choosing the Right Type of Investor

When evaluating funding options, entrepreneurs must consider the immediate and long-term needs of the company, level of involvement needed from a trusted mentor, and the amount of equity and control the founders wish to maintain moving forward.

Angel investors and venture capitalists are far from the only avenues entrepreneurs have to secure funding for their budding companies. Small business loans and crowdfunding will also finance a start-up business. Many entrepreneurs fund their ventures through their own savings. Still, finding a venture capitalist or angel investor who believes in a business is a fantastic way to get an idea off the ground and possibly gain some mentoring and connections.

Also Read

Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists)

Angel Investing by the Numbers: Valuation, Capitalization, Portfolio Construction and Startup Economics

#BreakIntoVC: How to Break Into Venture Capital and Think Like an Investor Whether You’re a Student, Entrepreneur or Working Professional

Startup Wealth: How the Best Angel Investors Make Money in Startups

Venture Capital Valuation, + Website: Case Studies and Methodology

Nomad | Early Stage Investor | Wannabe Anthropologist | Technology Evangelist | Curious, Inquisitive & Experimental Entrepreneur