Private Equity Tutorials
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Angel Investment vs Venture Capital Differences
- Angel investments are usually the earliest investments made in start-ups by wealthy investors who potentially contribute to the new business through their advice and experience apart from their own funds. Angel investors are generally former entrepreneurs who enjoy taking the risk, sometimes even before commercializing of the idea of the new business.
- Venture Capital investments are early investments usually made in growth companies by organisations who pool the funds from individuals, corporations, pension funds and foundations. Apart from fund contribution, venture capitalists take an active part by representing part of the board of directors of the investment firm, recruiting senior management and advising the top management in their strategic decisions. Venture capitalists take a calculated risk by thoroughly examining the revenue growth potential of the company to be invested and have to be particular about due diligence since they have a fiduciary responsibility towards the investors whom they represent.
Angel Investment vs Venture Capital Infographics
Here are the top 6 differences between Angel Investment vs Venture Capital.
Key Differences Between Angel Investment vs Venture Capital
The key differences between angel investment vs venture capital are summarised as follows:
- Angel investment is funded by investors who are usually high net worth individuals (HNIs) but Venture Capital investments are funded by companies who pool funds from several individual and institutional investors.
- Angel investors are usually former successful entrepreneurs who like taking a risk and use their experience to judge the ideas even before they have been proven or commercialized. Venture Capitalists are usually professional investors who take calculated risks and are more particular about due diligence due to their fiduciary relationship with pooled investors.
- While screening investments, Angel investors focus mostly on qualitative factors like the background of founders, the reason for business success, product-market fit etc. because most start-ups attracting their attention do not have much stable quantitative metrics to rely on. Venture Capitalists take more concrete metrics into consideration like revenue growth rate, average revenue per user (ARPU), customer lifetime value etc. This is more so because of the greater responsibility of venture capitalist to justify the investment decision to their investors.
- Angel investors like to provide mentoring guidance to the start-up owner. However, Venture Capitalist hold a seat in Board of Directors against the funding done. Hence, they are more involved in strategic decision making of the invested organization
Head to Head Comparison Between Angel Investment vs Venture Capital
Here are the main differences between the Angel Investment vs Venture Capital –
|Criteria||Angel Investment||Venture Capital|
|Meaning||In Angel investment, individual investor invest in pre-revenue business||Investment is usually made in pre-profitability business by company which pools money from individuals and institutions|
|Risk Level||This investment is highly risky since revenue stream is not certain.||This investment is comparatively less risky since revenue stream is proven but the profitability of the invested company is not yet prominent.|
|Investment size||Investment size is limited to few million||Owing to pooling of funds, investment size can range from few million to tens of million since the amount of funds at disposal with a venture capitalist is much higher|
|Type of investment||Type of investment is through Equity and /or SAFE (simple agreement for future equity) wherein the invested business gives the angel investor right to buy shares in future equity offerings||Type of investment is through equity and/or convertible debt|
|Time for investment decision and sales pitch||This investment takes shorter time for decision making since it involves an individual investor||Venture Capitalists take longer time to make the investment decision since they have to address several stakeholders with differing interests. Hence, it is tougher to convince venture capitalist for the investment decision|
|The rate of Return potential||This investment has high return potential sometimes even 100 times the investment.||Venture capital involves more calculated risks where later-stage investment returns could be much lower than Angel investment.|
Angel Investment vs Venture Capital – Conclusion
Both Angel investment and venture capital are significant drivers of economic growth since Angel investment vs venture capital take a high level of risk to support new organizations. Established companies like Google, PayPal etc. had started with the help of these types of investments.
So the question arises as to which investor to look for Angel investment or venture capital while starting a new business.
- Angel investors can go for limited cash outlay, are easier to convince in sales pitches and are more interested in a mentoring role which involves less intrusion in the investing firm. Hence Angel investments are ideal for seed financing where the invested organization hardly has any proven data like revenue stream for convincing the investor.
- In contrast, while venture capitalist can invest a higher amount in the business, they demand a place on the board of directors. In case, the requirement of funds is high as in the case of growth firms, the firm would have to endure taking decisions in conformance with a venture capitalist.
This has a been a guide to the top differences between Angel investment vs venture capital. Here we also discuss the Angel investment and venture capital differences with examples, infographics, and comparison table. You may also have a look at the following articles –