Angel Investor vs VC: How Are They Different?
When it comes to financing a startup, founders have a variety of options available. Two popular choices are angel investors and venture capitalists (VCs). Accepting an investment from an angel investor or a VC is a great way to access needed funding without taking on traditional debt. But what's the difference between these two types of accredited investors?
In this article, we'll compare and contrast angel investors and VCs to help startup founders like you understand which option is right for your needs. We'll look at the differences in terms of investment size, equity amount, involvement in the company, and more. With this information, you'll be able to make a more informed decision about which type of investor is better suited for your startup or small business.
What Is an Angel Investor?
An angel investor is a high net-worth individual (or group of individuals) who invests capital in early-stage businesses according to their valuation in exchange for equity or convertible debt in the form of a convertible note. This means they will inject money into your startup now in exchange for a percentage of the startup’s ownership, giving them a stake in your company’s profits as it grows.
Angel investors typically invest their own money and maybe entrepreneurs themselves. They usually invest in companies that they personally believe have great potential for high returns, and will. Angel investors are often the first source of funding for startups and can help bridge the gap between friends and family investments and venture capital investments.
What Is a Venture Capitalist (VC)?
A venture capitalist (VC) is another type of investor who provides capital to startup companies that have high growth potential. Like angel investors, venture capital investors typically invest in exchange for equity, meaning they receive a share of your company’s profits. In addition to venture capital funding, VCs often provide additional resources such as mentorship and advice to help your business succeed.
Venture capitalists are looking for the highest possible return on their investments and will eventually “cash out” via an exit strategy like an IPO or buyout.
How Does a Venture Firm Work?
VCs usually operate as part of a larger firm that specializes in investing in early-stage companies called a venture firm or VC firm. VC firms are typically structured as partnerships between general partners and limited partners.
General partners are professional venture capitalists who are responsible for managing the firm's investments — for example, the general partners are the ones who deal directly with startup founders, evaluating their pitches and negotiating investment contracts.
Limited partners provide the financial backing for the ventures in which the firm has invested. The limited partners in a venture capital firm are typically wealthy individuals, banks, and other institutional investors.
4 Important Differences Between VCs and Angel Investors
Here are four of the key differences between angel investors and venture capitalists:
1. They Invest Different Amounts
Angel investors typically invest smaller amounts of money than venture capitalists, usually ranging from $25,000 to $2 million. (The upper end of this range is usually only attainable when several angel investors combine their capital, forming what's known as an angel syndicate.) Venture capitalists, on the other hand, can invest much larger sums of money — frequently tens of millions of dollars — because they're backed by numerous institutional investors.
2. They Provide Different Benefits to Your Company
VCs typically provide more than just capital to their portfolio companies. They often bring in additional resources such as strategic advice, operational support, and access to networks of potential customers and partners. VCs may also help with recruiting, marketing, and other areas of the business. One of the advantages of working with a VC is that they will use the resources available to them as an investment firm to help your company (and their investment) succeed.
Angel investors typically focus solely on providing capital to early-stage startups. They may also offer advice or connections that could be beneficial for the startup’s growth, but angel investors are usually more hands-off than VCs when it comes to guiding your business plan, and typically don’t have the same level of resources available to them.
3. They Have Different Stakes In Your Company's Success
Angel investors have a personal stake in the success of your startup because they are investing their own money. They usually take a larger amount of equity since they're accepting a greater amount of risk by investing their personal funds into a startup with little to no track record. More often than not, angel investors invest their money based on their faith in the founding team and the strength of their vision. Their motivations for investing involve the potential for a high return on investment, but they are also likely to be truly passionate about your product or service and want to see it succeed.
Venture capitalists, on the other hand, have a professional stake in the success of your startup since their investments come from limited partners who expect returns on their investments. VCs typically invest later than angel investors, after your startup has already displayed evidence of early traction and is ready for explosive growth fueled by a large capital investment — VCs want their capital to be the investment that unlocks that latent growth potential so they can share in the returns. Since there is less risk involved at this stage, VCs often accept a smaller amount of equity in exchange for their investment.
4. They're Interested In Different Levels of Control
Angel investors are generally interested in helping entrepreneurs build their businesses, but they tend to take a more passive approach to their angel investments. They may provide advice and guidance, but they are usually not involved in the day-to-day operations of the company. Angel investors typically do not require board seats or controlling stakes in the companies they invest in. Instead, they focus on providing capital and mentorship to help the entrepreneur succeed.
On the other hand, VCs have a professional stake in protecting and limited partners to answer to, so they are often more hands-on with their approach to ensuring the company succeeds. They often require board seats and may even appoint key leadership positions within the company as part of their investment terms. It's not unusual for a founder to give up their controlling stake in the company as part of the terms of a deal with a VC. As part of the more active role VCs take, they may provide additional resources such as access to networks or industry expertise that can help your startup scale up quickly.
Should You Pitch to VCs or Angel Investors?
Depending on your startup’s situation, you may not have much of a choice when it comes to deciding whether to seek funding from an angel investor or a VC firm. Angel investors and VCs typically invest in companies at particular stages of their lives. Angels are more likely to invest in very young startups that are still finding their footing or later-stage startups in need of technical financing, while VCs are more likely to invest in companies that have established a customer base and are in the early stages of growth.
However, there is certainly some overlap between the types and ages of startups that angel investors and VCs are interested in. Here’s a side-by-side comparison to help you see how the pros and cons of each type of investor measure up against one another.
Angel Investors vs VCs: Pros and Cons
Angel Investor Pros
- Early Funding. Angel investors are usually the more willing of the two to invest in early or even seed stage startups that don’t yet have a strong track record. They’re more likely to invest based on faith in the idea or the founders alone.
- Great for Networking. Angel investors can be fantastic resources for expanding your network. They may be able to introduce you to founders, mentors, or investors who could help you further down the line.
- You Keep More Control. Angel investors usually ask for a smaller amount of control over the management of your company.
- Venture Capitalist Pros
- Large Investments. VCs usually make very large capital investments since their funds are supplied by many different limited partners.
- VCs Take Less Equity. VCs usually take a smaller amount of equity to reflect the smaller amount of risk associated with a later-stage investment.
- Additional Support. VCs usually provide other kinds of support aside from capital — they are usually experienced themselves in your startup’s industry and can provide useful advice, feedback, and guidance in many forms. It’s common for venture capitalists to take an active role in aiding the development of the companies they invest in.
Angel Investor Cons
- Smaller Investments. Angel investors usually invest smaller amounts than VCs since they’re investing with their own money, not a pool of money from various institutional investors.
- Less Non-Capital Support. Angel investors usually aren’t as hands-on with the guidance they provide (though some may offer a great deal of business strategy insight — it depends on the particular angel investor.)
- Angels Take More Equity. Angel investing typically means guaranteeing a bigger equity stake to reflect the bigger risk angel investors are taking by investing their own personal money in an (oftentimes) unproven startup.
Venture Capitalist Cons
- Less Interested in Early Funding. Since VCs have a responsibility to provide returns on their limited partners’ money, they are usually less willing to invest in very early-stage startups. They usually prefer to come into the picture once there is some proven traction to build upon.
- You Give Up Some Control. VCs will expect some degree of control over your company, often including a board seat. This is to protect their investment, since they have limited partners to answer to who have put money on the line. It’s not uncommon for a founder to no longer have a controlling share in their company after making a large venture capital deal.
How to Pitch to Angel Investors and VCs
Just like there are different pros and cons to working with VCs or angel investors, there are also different best practices when it comes to pitching your startup to them. Here’s a brief overview of how each of these types of investors evaluates startups and some tips for pitching to them successfully.
Pitching to Angel Investors
1. Find the right angel investor. Before you start pitching your startup to anyone, it’s important to identify the right investor for your business. Research potential investors and make sure they have a history of investing in startups similar to yours. Also make sure their goals and values align with yours, as well as their investment style.
2. Tell a compelling story. Your pitch should tell a compelling story that captures the attention of the angel investor and makes them interested in learning more about your startup. Explain why you started this business and how it will benefit society or solve a problem. Many angel investors invest primarily (or exclusively) in startups that interest them and inspire them personally. They are usually less interested than VCs in breaking down the numbers (though some hard evidence of growth potential doesn't hurt), so your pitch should focus heavily on emotional impact.
3. Communicate a strong vision. Angel investors frequently factor their level of faith in the founding team into their decision-making. They want to know that you have a clear vision of where your company is headed and how it will get there. Demonstrate to angel investors that you understand the market opportunity well and articulate what sets your business apart from others in the space. Showcase any plans for expansion or growth initiatives that are already underway or planned for the future, but don't delve too far into the weeds of your business operations during the initial pitch.
Pitching to Venture Capitalists
1. Present your product as a solution. When pitching a startup to a venture capitalist, it is important to present your product as a solution to an existing problem or need. Explain how your product can provide value and make life easier for customers. Be sure to clearly articulate the problem you are solving and why there is value in solving it.
2. Show evidence of long-term profitability. Venture capitalists want to invest in startups that have the potential to generate huge returns down the line. Provide evidence of customer demand and market potential by showing market research data, customer surveys, or other proof of concept documents that demonstrate the viability of your business model over time.
3. Highlight growth potential. When pitching your startup to VCs, it's essential to highlight its growth potential. Demonstrate how your startup can use the VC's money to scale up quickly and efficiently by focusing on key metrics such as user acquisition rate, revenue growth rate, and customer retention rate. Showing VCs that your startup is poised for expansion will help convince them that they should back your project with their money.
4. Address weaknesses. No startup is perfect, and every VC knows this all too well. Therefore, it’s important to be honest and upfront about any weaknesses or risks associated with your project when pitching it to venture capitalists. Acknowledge any challenges you expect to face in terms of competition, technology limitations, or whatever else the case may be, and explain how you plan on overcoming those challenges in order to succeed in the long run. VCs want to see this honesty and they may even have the resources to offer solutions.
How to Become an Angel Investor
Becoming an angel investor and becoming a venture capitalist both involve distinct paths and prerequisites, though they may overlap in places.
Angel investors are typically individuals with significant personal wealth, often stemming from entrepreneurial success, inheritances, or high-paying careers. They network within the startup ecosystem, conduct due diligence, and invest their own money in startups. A key requirement is a high tolerance for risk due to the uncertain nature of startup investments.
How to Become a Venture Capitalist
In contrast, venture capitalists usually have strong educational backgrounds in finance or related fields, as well as professional experience in sectors like investment banking or private equity. They raise funds from institutional investors, establish extensive networks, and actively source investment opportunities. They need to understand how to conduct thorough due diligence, manage their portfolio companies, and achieve profitable exits through methods like IPOs or acquisitions. Additionally, venture capital firms are often subject to strict regulatory requirements, which makes some legal knowledge a plus for VCs as well.
While these are typical routes and requirements, some exceptions exist. Ultimately, both angel investors and venture capitalists play essential but unique roles in funding and supporting startups.
Get Help Pitching to Investors
Startup fundraising can feel overwhelmingly complex at times, but it doesn't have to be an intimidating task. A great way to make the fundraising process easier is to get help from an experienced mentor.
A mentor can provide valuable guidance and advice on how to navigate the process of preparing your pitch deck and evaluating different types of investors. A mentor can also provide insight into which investors may be more likely to invest in your business, as well as provide guidance on how best to approach them — they may even be able to provide introductions.
Find a qualified online mentor and get connected in practically no time at all!