Finance is a big part of any business endeavour, and growing a business without proper financing is nearly impossible. It is incredibly challenging for small businesses in the sprouting stage because most banks do not lend capital to any company based on their future potential.
Key Takeaways
- Angel investors are high-net-worth individuals who fund startups or small businesses; venture capitalists are professional investors managing funds that invest in multiple companies.
- Angel investors typically invest their funds and make individual decisions; venture capitalists represent firms with pooled resources from various sources.
- Both angel investors and venture capitalists provide funding and guidance to businesses, but angel investors usually invest earlier in a company’s lifecycle, while venture capitalists invest at later stages.
Angel Investor vs Venture Capitalist
The difference between Angel investors and Venture capitalists is that they invest in a new company in its early stage of growth. At the same time, most venture capitalists are professional investors who only invest when a new company indicates potential future development.
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In this circumstance, angel investors and venture capitalist firms can become very helpful. In exchange for equity or convertible bond, they often invest in businesses with a high growth potential.
Unlike banks or other financial institutions, there is no requirement for collateral for funding.
Many businesses in Silicon Valley took advantage of angel investors and venture capitalist firms and became large corporations within a few years. After successfully becoming a large entity, they went for public offering and returned the profit to their angel investor and venture capitalist firms.
Comparison Table
| Parameter of Comparison | Angel Investor | Venture Capitalist |
|---|---|---|
| Type of investor | Wealthy Individuals. | Investment firm. |
| Ability to invest capital | Less. | More. |
| Time of investment | At the beginning | When the company show an indication of growth |
| Control of the business | Sometimes they demand control over the business from the founder. | None. |
| Source of investment | Personal. | From limited partners. |
| Commonly known as | Informal investors, private investors, angel funders, seed investors, business angels, etc. | VC. |
What is Angel Investor?
Angel investor is those people who invest capital in the early stage of any business or startup. Most angel investors are affluent individuals investing in exchange for equity or convertible debt.
Depending upon the scope of the business, the investment money may vary widely. An angel investor can invest much less capital in the industry than other investment institutes.
Angel investors are known by other names like informal investors, private investors, angel funders, seed investors, business angels, etc. Although anyone can become an angel investor, most angel investors are qualified as accredited investors.
According to the Securities Exchange Commission (SEC) report, the worth of most angel investors is over $1 million.
Compared to other financial institutions, an angel investor takes a higher risk at the time of investment. Their proportion of shares also dilutes with a further round of investment.
For this reason, they demand large portions of the share in the business. The angel investor often takes some control of the business from the company’s founder.
Although most angel investors are not bound to any due diligence, some of them track the company’s financial activity and provide valuable advice to the business.
What is Venture Capitalist?
Venture capitalists are one type of financial firm that invests in emerging companies and high-potential startups. In the market, they are commonly referred to as VC.
Most Venture capitalist firms hold large amounts of capital, and they are made up of a group of professional investors.
Most venture capitalist firms raise their capital from their Limited Partners, also known as LPs. After gathering large amounts of money, they search and invest in companies with a high growth rate or chance of success.
Before investing in any company, they verify its financial statements and estimate its potential. Most of the time, the company founder or the CEO has to explain their future guidance to the venture capitalist.
Unlike institutional investors, most venture capital firms only invest in the company before it goes public through an IPO. Venture capitalist firms also take large portions of the company share, but they do not take control of the company.
However, they can sell their share to other venture capitalist firms.
Depending upon the financial requirement of the company, the venture capitalist firm may do multiple rounds of investment in the company. When venture capitalist firms profit from the investment, they share the profits with their Limited Partners.
Main Differences Between Angel Investors and Venture Capitalists
- According to the Securities Exchange Commission (SEC) report, most angel investors are wealthy. At the same time, most venture capitalists are a group of financial investors.
- The capital investment capacity of an angel investor is pretty limited, but venture capitalist firms can invest much more capital in the business.
- Most angel investors endow their capital at the beginning stage of the business when the company is sprouting. On the other hand, most venture capitalist firm only invests in business when they see the potential for growth in the company.
- Angel investors utilize personal capital for their ventures. But venture capitalist firms get their funding from limited partners.
- Sometimes angel investors might demand control over the business from the founder. However, a venture capitalist firm never takes any power from the founder.
- In the financing world, most angel investors are informal investors, private investors, angel funders, seed investors, business angels, etc. While venture capitalist firms are known as VCs
- https://www.sciencedirect.com/science/article/pii/S0883902608000128
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1028592
- https://cloudfront.escholarship.org/dist/prd/content/qt5rz3w67b/qt5rz3w67b.pdf
- https://people.bath.ac.uk/mnsrf/Teaching%202012/JBV%20article%20Oct%202009.pdf
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
