In order to keep your startup alive, you need capital. At almost every stage of their business, entrepreneurs are asking themselves “How do I finance my startup?”.
Some of the options include funding from a venture capitalist (VC) or angel investor. But who are they? How are those investors different? How do you know which one you should pitch to in order to raise money for your startup?
We will determine the differences between those two types of investors, but before that, let’s understand who those people are and how they work.
Angel investors are individuals who use their own money to invest in early stage companies. In many cases, they are accredited investors who are required to have a minimum net worth of $1,000,000 and an annual income of at least $200,000.
Venture capitalists (VCs) are people or firms who use money pooled from large corporations, pension funds and investment companies to invest into other companies. Usually VCs do not use their own money to invest in commercial businesses
What are the key differences?
- When they invest.
- Angel investors usually invest in businesses that are just starting out. That means angel investors take more risks than venture capitalists because angel investing is oriented to financing the companies that have not proven themselves yet.
- Venture capitalists tend to invest in already established companies to reduce their risk of losing investments.
- Investment amounts. Another difference between angel investors and venture capitalists is the amount of capital that they are willing to offer.
- Angel investors typically invest between $25,000 and $100,000 of their own money.
- Venture capitalists invest an average of $7 million in a company. (https://www.rockiesventureclub.org/colorado-capital-conference/how-do-angel-investors-differ-from-venture-capitalists/)
According to the analysis report of KPMG, the median angel deal size worldwide in 2019 was $1.7 million. On the other hand, median deal size of later stage venture capital backed companies in the same year amounted to 10.3 million US dollars. (https://www.statista.com/statistics/828788/venture-capital-median-deal-size-by-stage/)
- Involvement – Both VCs and angel investors want to have business equity in a startup they invest in.
- Angel investors, unlike VCs, act as mentors and may be involved as a non-voting observer on the Board of Directors. Angels might also help startup founders with forming connections with lawyers, banks, and accountants.
- Venture Capitalists might ask that the startup founder establishes a Board of Directors and gives them a seat on it after making investment.
The decision on which investors to approach will depend on the stage of your business and how much you want the investor to be involved in it. In any case, raising capital from investors is hard work. In order to improve the chances of getting investment, you should take the time and consideration to build value and get a higher valuation for your company before raising capital and diluting its equity.
Want to learn more about angel investing? Check out startAD’s annual symposium, Angel Rising.