When seeking equity funding for your business, the two primary options are angel investors and venture capitalists.
This article will teach you the difference between these two types of investors and help you determine which one is right for you.
The Difference Between Angel Investors and Venture Capitalists
Angel investors are individuals who invest their own money in companies.
A venture capitalist, who typically works as part of a venture capital firm, invests the money of others hoping to get a handsome return.
The primary difference between angel investors and venture capitalists is that venture capitalists invest solely for return on investment (ROI). That is venture capitalists make investment decisions based on the ROI they expect or hope to receive from their investment.
While angel investors care about ROI too, they often have other motivations such as:
- Knowing or liking the entrepreneur and wanting to see them succeed
- Ego: feeling good about investing in specific firms and having others know they invested
- Perks: as an equity holder, they are sometimes entitled to perks (e.g., if investing in a restaurant, they can go there and receive free meals and special attention)
Venture Capital Criteria
There are several criteria venture capitalists (VCs) use when judging whether to invest in a company or not. These criteria will help you understand whether VCs or angel investors are most appropriate for you.
More and more VCs will only fund companies if they have revenues or, at least, beta customers or a prototype built. If you have not achieved any of these milestones, then angel investors are more appropriate.
Another key criterion is how much money you need to raise. If you need to raise less than $1 million, generally you should seek angel investors. Most venture capital firms don’t invest less than $1 million or $2 million dollars.
Most VCs have very specific sectors in which they focus. For instance, some VCs focus exclusively on the Healthcare sector. Others only invest in software. Nearly all focus on the technology sector since such ventures have the highest chance of growing quickly and getting to a large exit (sale of company or IPO).
Conversely, most retail or services business grow more slowly, and although they may be great investment opportunities, they are more suitable for angel investors.
Most venture capitalists only invest (or strongly prefer to invest) within a certain geographic range.
Most VC firms invest within 150 miles of their location. For angel investors, 70% of angel investments are made within 50 miles of the angel’s home or business location.
So, if you are located far away from VC firms, then angel investors are probably a better option.
A Common Scenario: Raising Angel Funding THEN Venture Capital Funding.
A very common scenario is for a company to start by raising angel funding and then VC funding later.
It generally works as follows. You raise your initial funding from the angel investors, which is usually a smaller amount, such as $50,000 to $500,000.
You use that funding to progress your business, to create a prototype, to get beta customers and/or to ideally generate revenues. Once you’ve achieved such milestones, you seek venture capital. In fact, you might raise multiple rounds of venture capital. You might start with a $3 million round of venture capital to get to the next level of success, and then you might raise a $10 million, or a $20 million, or even a $50 million round of venture capital later.
One of the most famous examples of pursuing this funding path is Google.
Google initially raised funding from friends and family, and from credit cards. It then received angel funding from Andy Bechtolsheim.
The funding from Bechtolsheim allowed Google to achieve milestones and grow. Google subsequently raised an initial amount of venture capital, then larger amounts of venture capital, and eventually Google went public.
While there are differences in funding deal terms (e.g., how much equity they take, whether they take a board seat, etc.) between angel investors and venture capitalists, the bigger and more important difference is which type is more relevant to fund your business in its current state.
Without funding your business can’t grow to its fullest, so make sure to go after the investor type that is best suited for you.
Venture Capital vs Angel Investors Infographic
Below is an infographic of this article for quick reference.
To further help you decide between venture capital and angel investors, we put together the slide presentation below to show you “The Key Differences Between Venture Capital & Angel Investment.”