Finance is a big part of any business endeavor, and growing a business without proper financing is nearly impossible. It is especially challenging for small businesses when they are in the sprouting stage because most banks do not lend capital to any business based on their future potential.
Angel Investor vs Venture Capitalist
The main difference between Angel Investor and Venture Capitalist is that angel investors are those individuals who invest in a new company in its early stage of growth, while most venture capitalists are a professional group of investors who only invest when a new company shows indication of potential future growth.
In this circumstance, angel investors and venture capitalist firms can become very helpful. In exchange of equity or convertible bond, they often invest in those businesses which got a high potential for growth. Unlike banks or other financial institutions, there is no requirement of collateral for funding.
Many businesses in Silicon Valley took advantage of angel investor and venture capitalist firms and became a large corporation within a few years. After successfully becoming a large entity they went for public offering and return the profit to their angel investor and venture capitalist firms.
Comparison Table Between Angel Investor and Venture Capitalist (in Tabular Form)
| 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 on the business | Sometimes they demand control over business from the founder. | None. |
| Source of investment | Personal. | From limited partners. |
| Commonly known as | Informal investors, private investors, angel funder, seed investors, business angels, etc. | VC. |
What is Angel Investor?
Angel investor is those people who invest capital for the early stage of any business or startup. Most angel investors are affluent individuals who invest in exchange for ownership equity or convertible debt.
Depending upon the scope of the business the investment money may vary widely. Compared to other investment institutes, an angel investor can only invest much less amount of capital in the business.
Angel investors are known with various other names like informal investors, private investors, angel funder, 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 share also dilutes with a further round of investment. For this reason, they demand large portions of share in the business. Many times the angel investor also takes some control of the business from the founder of the company.
Although most angel investors are not bound to any due diligence, some of them track the financial activity of the company 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 with 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 capital they search and invest in those companies which got a high rate of growth or high chance of success.
Before investing in any company they verify the financial statements of the company and estimate their 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 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 portion of the 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 make any profit on the investment, they share the profits with their Limited Partners.
Main Differences Between Angel Investor and Venture Capitalist
- According to the report of the Securities Exchange Commission (SEC), most angel investors are wealthy investors. While most venture capitalists are a group of financial investors.
- The capital investment capacity of an angel investor is fairly 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 of growth in the company.
- Angel investors utilize personal capital for their ventures. But venture capitalist firms get their funding from limited partners.
- Some time angel investors might demand control over business from the founder. However, a venture capitalist firm never takes any control from the founder.
- In the financing world most angel investors are known as informal investors, private investors, angel funder, seed investors, business angels, etc. While venture capitalist firms are known as VCs
Conclusion
There are many successful business entities are established in Silicon Valley who took finance from both angel investors and venture capitalists at their sprouting stage. Due to the positive contribution of angel investors and venture capitalist firms these businesses able to establish themselves now.
Even though there is no requirement of collateral for accessing capital from angel investors and venture capitalist, but getting investment from these investors are not that easy. Out of thousands of companies, only a handful of companies get capital from angel investors and venture capitalist firms.
Both angel investors and venture capitalist firms take huge financial risks at the time of investment. For this reason, they verify the future potential of the company. The founder of the company or the CEO pitches their ideas to the angel investors and venture capitalist firms for the funding.
References
- 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