People often believe that business angels, venture capital and private equity are all one and the same. But there are important differences to know about.
Put simply, an angel investor is someone who puts their own finance into the growth of a small business at an early stage, also potentially contributing their advice and business experience. They might be a wealthy, well-connected individual who’s taken a personal liking to your product, a group of angel investors who club together to fund startups, or even a friend or member of your family who’s decided to put some money in.
Angels make their own decision about the investment, and in return for providing personal equity they take shares in the business. The amount they invest is flexible – it could be a small amount to get you off the ground, or a larger amount. While they can provide insight and advice about your business, their job isn’t to build up your company.
Venture capital funding is a whole other level. For a start, rather than individual investors, winning venture capital usually involves a whole firm – investors, board members, and people whose job is to generally help your business develop. Venture capital firms are made of professional investors, and their money comes from a variety of sources – corporations and individuals, private and public pension funds, foundations.
The job of venture capital firms is to find businesses with high growth potential. The firm take shares and have a say in the future of the company and its running, and in exchange for their involvement venture capitalist firms expect a high return on investment. After a period of time, often years, the venture capitalists sell shares in the company back to the owners or through an initial public offering, hopefully making much more that what they put in.
Key differences between angel investment and VC investment
Angel investors will put in a variety of amounts, but as it’s generally seed funding you’re not looking at the kind of figures that VC investment deals with. As a general rule, groups of angel investors might be quite high – but VC firms invest in way higher amount of money. Because so much time and effort goes into brokering a VC deal, it needs to be worth the company’s while.
While the concept of too much funding might seem ridiculous to cash-strapped startups, with great funding comes great expectations, which is a lot of pressure to put on a fledgling business. You have obligations to your investors, and over-valuation of your startup can have serious consequences down the line.
Who they invest in
Angel investors specialise in early-stage businesses, while VC firms are generally more unwilling to invest in startups unless they show really compelling promise and growth potential. While incredibly exciting startups in key industries might be able to win VC funding with little track record, most businesses will have to demonstrate that they can walk the walk, not just talk the talk.
Angel investors might have valuable advice for you, but ultimately they can be as hands-on or hands-off as you want. They will have equity in your business but will not have a seat on your board – unlike with VC investment. Agreeing to VC investment means committing to bringing more people into how your business, people who have a say in how it’s run and whose job it is to help your business reach its potential. While this can be a huge positive, if you’re at an early stage it might be overkill, and you might not have the flexibility to pivot or change focus – too many cooks can spoil the broth, so to speak.
VC firms need to evaluate their involvement with you – due diligence, research, and all the other aspects that help them decide if investing in you is a smart business decision that will see them reap a big return. This all takes time. On the other hand, angel investors can make quick decisions, as they’re often working alone or have a personal interest in the business.
The job of VC firms is to find the best businesses, help them, and then make a lot of money. For angel investors, their motivations might be different – to help less experienced businesses within their sector, for example. Though making a return on investment is also a factor.
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