If you’re starting a business and looking for funding via investment, it’s important to know how several aspects of the venture financing landscape work. This includes the difference between angel investor vs. venture capitalist, and which of the two is more relevant to your business goals at your current stage. The world of venture capital and venture financing is complicated, so the more you understand, the better you’ll be able to position yourself to pitch investors and, hopefully, receive funding.
We’ll go over the angel investor vs. venture capital definitions, the pros and cons, and when you’d engage with each. By the end, you should not only know how these two types of investors work, but also how you should be directing your goals relative to which you’d like to work with.
Angel Investor vs. Venture Capitalist: The Main Differences
The main differences between angel investors vs. venture capitalists are who is doing the investing, stages at which they invest, and the amounts typically invested. Angel investors are usually private, high-net-worth individuals or groups of people who write relatively small checks in companies’ early stages. Venture capitalists are not private individuals, but rather work for a large fund to provide venture funding to businesses at many different stages. Checks from venture capitalists are generally much bigger than ones written by angel investors.
What Is an Angel Investor?
Angel investors are high-net-worth individuals who invest money into nascent companies in order to accelerate their growth. They invest in very early days and with smaller amounts of capital than venture capitalists. These investments are generally in exchange for equity or a convertible note, which is a short-term debt instrument that converts to equity down the line.
Angel investors can also be groups of people—often called an “angel syndicate”—that invest with pooled money and share equity. Anyone can become an angel investor if they’d like to and have the capital to do so, but angel investors are often accredited investors, as designated by the requirements of the SEC. There is also no requirement as to where the money they’re investing must come from—it can be money from past business ventures, family money, celebrity money, or something else entirely.
The funding that angel investors provide is meant to serve as a growth accelerant and is often bridge financing to a company raising its next full capital round, such as a seed round.
What Angel Investors Invest In
Angel investors aren’t confined to investing in one specific type of business, but very often they will invest in a product or company that directly aligns with their experience or knowledge. For instance, a former beverage company CEO might be more interested in investing in a CPG (consumer packaged goods) business than, say, an automotive business, due to their familiarity with the space and the expertise they’ll be able to bring.
If you are seeking out an angel investor, you can certainly reach out to people who have experience and success in different industries, but you might find yourself most successful with angel investors who have relevant experience.
Angel investors also aren’t as fixed on massive returns the way venture capitalists are. They will be more amenable to investing in businesses that have the potential to be successful, but aren’t necessarily the next Netflix or Uber.
What Is a Venture Capitalist?
Venture capitalists are usually employees of a larger venture capital firm wherein money is deployed for financing through a large fund. Venture capitalists invest at many different stages of the venture process—from the seed round through subsequent Series A, B, C, etc. raises—and write much larger checks than angel investors. These often reach into the millions of dollars.
The investments generally come from the VC fund and not the individuals specifically. Within venture capital funds are generally partners or investors who have specific specializations, such as fintech or retail, that will be evaluating your business as to whether it’s a fit for venture financing.
What Venture Capitalists Invest In
One major difference between angel investors vs. venture capitalists is the type of projects they’re looking to invest in. Venture capitalists want businesses with very large market caps from whom they predict an immense return—often 10x or more. (This is obviously a bit different from angel investors, who are looking to make a return, but are often satisfied with a smaller multiple.) That makes projects that have the potential to do well but not be huge less enticing for venture capitalists.
Venture capital financing is meant to quickly accelerate growth on a larger level and very quickly. It’s important to note that VCs are looking for companies whose growth and future plans will carry them toward either a high-ticket acquisition or an IPO. If that’s not where a business is heading, it may not be considered a lucrative play for a venture capitalist.
Like angel investors, some venture firms have specific knowledge, which they leverage to invest in specific types of businesses or sectors.
When to Work With an Angel Investor vs. Venture Capitalist
There are specific times when you’d choose an angel investor vs. venture capitalist. Here are a few ways to think about it:
When to Work With an Angel Investor
If you’re in very early stages of your company, it’s likely that you’ll want to consider first approaching an angel investor. Although some venture capitalists will jump into earlier-than-usual investments, it’s not common, especially if you don’t have a lot of data, revenue, or many customers. If you’re also hoping that your team’s experience and vision is enough to interest an investor, then an angel who knows a lot about your industry and can understand your intended trajectory could be a good target. Plus, if you’re in a position where a small check can help you, an angel investor can be significantly helpful, too.
Other factors to consider:
- Your company is in very early stages
- You may not be in a hyper-growth industry or are not yet sure of your path to massive growth within your sector
- You don’t need a massive check to stimulate growth
- You’re a “pre-valuation” startup
- You’d like to raise capital on a convertible note
When to Work With a Venture Capitalist
The time to approach a VC will likely be a little more obvious to you. You’ll be in a position in which your company is generating meaningful data and sales as well as has recurring revenue. You should consider working with a venture capitalist when your company has a valuation that you’re comfortable with derived from this information. Additionally, if you’re looking for a big check, and don’t mind going through an intensive due-diligence process, a VC could be a good fit.
Other factors to consider:
- When your company is both developed and valued
- When you have a significant track record of success and clear, data-supported picture of opportunity
- When you need a significant cash infusion to take your business to the next level and kick into hypergrowth
- When you have a path to a major exit or IPO
- When you’re comfortable with giving up equity
Angel Investors vs. Venture Capitalists: Pros and Cons
Working with angel investors vs. venture capitalists involves two different processes. Both will meet the founders and the team and look at financials and projections, but the depth of the dive and the breadth of the research is not comparable between the two.
As individuals or small groups, angel investors understand that they’re coming into a potential investment with less information than a venture capitalist. The business has very little data, metrics, and financial information, and, as a result, the bets that angels make are on the founders and team themselves.
Angel Investor Pros
- Easier pitch process
- Investments happen on faith and character, which is a benefit for early-stage businesses
- Less due diligence
- Potential to have a personal relationship with your investor
- Investment may be faster
- May reinvest at later stages, too
- May be able to avoid bureaucracy associated with having a larger fund attached
Angel Investor Cons
- Lower capital amounts (often $25,000 to $100,000, sometimes more)
- Often need to give up a board seat to compensate for high-risk investments
- More relationship-building involved
Working with a venture capitalist generally comes when your business is further down the line and your path to growth is underway with a very clear future trajectory. Venture capitalists are looking for major opportunities and will deeply rely on the data you’ve collected in early stages to make their investments.
Venture Capitalist Pros
- Sizable check amounts into the multimilions
- Ability to join a network of other companies in whom they’ve invested
- Potential for more, larger investments in the future as your business grows and continues to raise capital
Venture Capitalist Cons
- More involved pitch process
- Decisions may take longer since venture capitalists are part of a larger VC firm
- Long, intensive due diligence process which may slow down the investment process
- May look for larger equity percentages in order to mitigate their risk and justify their investments
The Bottom Line
No matter which approach you try first, make sure that you have a very strong, coherent, and easy-to-understand pitch—as well as a thorough business plan. Even if you think that your company is going to be the next big thing, the whole point of the venture capital and investment process is convincing someone to feel the same way, too. Communicate clearly, anticipate questions (or try to answer them before they’re asked), and have a clear sense of your market, opportunity, and plans.
If neither angel investors nor venture capitalists are right for your business, you may want to explore more traditional business loan options, such as SBA loans, lines of credit, equipment financing, and even business credit cards.