When it comes to financing startups and emerging companies, many people mistakenly equate angel investing with venture capital financing. While both are popular means of funding new businesses and provide much needed capital for companies that are strapped for cash, the similarities end there.
There are significant differences between angel and venture capital funding in terms of both the characteristics of the investors themselves and the terms of their investments. Before you seek out funding for your new business, you should consult an adviser who’s well-versed in the complexities of angel investing and venture capital financing to determine which course of action is best suited for your business.
Just as every business is unique, no two financings are the same. Generally speaking, however, the following are some of the most notable differences between angel and venture capital funding.
The Identity of the Investor
Angel investors are individuals looking to invest their own funds. It’s not uncommon for them to be successful business people who want to back promising new businesses in their field. Venture capitalist investors, on the other hand, are firms or companies that pool money from groups of investors into a combined fund to invest in emerging businesses. Because of the differences in the nature of the money being invested, there also tends to be a different tolerance for risk – angels who are investing their own money may be more risk averse, while funds that are investing strangers’ money might be more willing to take on greater levels of risk.
The Stage of the Company
Generally speaking, angels are looking to invest in startups and early-stage businesses that are just starting to engage in technical development and market research. In contrast, venture capitalists rarely back startups unless there are unique circumstances, like well-known or already successful founders. Instead, they most often invest in emerging businesses that are more established, seeing them through their growth stages and into IPOs or mergers.
The amount that angels invest as compared to venture capital firms is one of the biggest differences between the two forms of capital. Given that they’re individuals investing only their own funds, most angel investments are significantly below the $1 million mark, and more typically in the $25,000-100,000 range. Venture capital firms have a lot more funds to invest, since they’ve pooled money from a number of investors. The typical venture capital investment starts in the $3-5 million range, and can go even higher.
The Level of Contribution and Involvement
There are also significant differences in what the two types of investors contribute to the business and how involved they intend to be. Angel investors frequently have industry experience or contacts to offer, but very rarely want to have any sort of direct involvement in the running of the business. Venture capitalists are the complete opposite. They typically expect to have a high level of involvement in the business’s decision-making, often going so far as to demand a seat on the board of directors.
The Length of Investment
Venture capitalists tend to be invested for a lot longer than angel investors. Angels are commonly invested for a period of two to five years before exiting the investment. In contrast, venture capitalists typically stay invested for at least 10 years before getting out.
Whether either angel or venture capital investing is right for you will ultimately depend on a combination of the above factors. Just as no two businesses are the same, there’s no hard-and-fast rule that dictates which form of capital to seek out at any given time. A trusted business law attorney who understands the ins and outs of angel and venture capital investing can help you determine what source of funding is best for your unique business.
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