Angel Investment vs Venture Capital

Article byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Angel Investment and Venture Capital

Angel investments are investments made by informal investors having a high net worth. In the case of Venture capital, investments are taken from the venture capital firms funded by the companies that pool funds from different institutional investors or individuals.

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 funds. Angel investors are generally former entrepreneurs who enjoy taking the risk, sometimes even before commercializing the idea of a new business.

Venture Capital investments are early investments usually made in growth companies by organizations that pool the funds from individuals, corporations, pension funds, and foundations. Apart from fund contribution, venture capitalists participate by representing part of the board of directorsThe Board Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more 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 company’s revenue growth potential to be invested in and have to be particular about due diligence since they have a fiduciary responsibility towards the investors they represent.

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Angel Investment vs. Venture Capital Infographics

Let’s see the top differences between angel investment vs. venture capital.

Angel Investment vs Venture Capital Infographics

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Key Differences

  1. Angel investment is funded by investors who are usually high net worth individualsHigh Net Worth IndividualsA high net worth individual possesses liquid assets worth $1 million to $5 million. They are also referred to as HNWIs. In order to qualify for HNWI status, the individual’s liquid assets must be readily available in their bank or brokerage accounts. The assets must be accessible and easily converted into cash.read more (HNIs). Still, Venture Capital investments are funded by companies that pool funds from several individual and institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more.
  2. Angel investors are usually former successful entrepreneurs who like taking a risk and using their experience to judge 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 relationshipFiduciary RelationshipA fiduciary relationship is a relation between two parties wherein one party (fiduciary) has the duty to act in the best interest of the other party (beneficiary or principal). The purpose of studying fiduciary relationship is to identify the areas where it exists and gain an insight into the duties of a fiduciary.read more with pooled investors.
  3. While screening investments, Angel investors focus mostly on qualitative factors like founders’ background, the reason for business success, product-market fit, etc. Most start-ups attracting their attention do not have many stable quantitative metrics. Venture Capitalists consider more concrete metrics like revenue growth rate, average revenue per user (ARPU), customer lifetime value, etc. It is more so because of the greater responsibility of venture capitalists to justify the investment decision to their investors.
  4. Angel investorsAngel InvestorsAngel investors refer to wealthy investors who supply capital to budding businesses in return for a portion of their equity. read more like to provide mentoring guidance to the start-up owner. However, Venture capitalists hold a seat on the Board of Directors against the funding done. Hence, they are more involved in the strategic decision-making of the invested organization.

Angel Investment vs. Venture Capital Comparative Table

CriteriaAngel InvestmentVenture Capital
MeaningIn Angel investment, individual investors invest in a pre-revenue business.Investment is usually made in the pre-profitability business by a company that pools money from individuals and institutions.
Risk LevelThis investment is highly risky since the revenue stream is not certain.This investment is comparatively less risky since the revenue stream is proven, but the profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more of the invested company is not yet prominent.
Investment sizeInvestment size is limited to a few million.Owing to the pooling of funds, investment size can range from a few million to tens of millions since the number of funds at disposal of a venture capitalist is much higher.
Type of investmentThe type of investment is through Equity and SAFE (simple agreement for future equity), wherein the invested business gives the angel investor the right to buy sharesBuy SharesKnowing how to buy shares is crucial for a person who wants exposure to the equity market. Equity markets are volatile, and timing is very important. Shares trade in exchanges, but you just can’t go and buy a share from the exchange. There are several steps involved in purchasing a share.read more in future equity offerings.The type of investmentType Of InvestmentStocks, bonds, and cash equivalents are the three main forms of investments. Investment, in general, refers to the purchase of anything for future use with the goal of generating a regular cash flow or increasing the value of something over time so that it can be sold for a higher price than it was purchased for, i.e. capital gains. read more is through equity and/or convertible debt.
Time for investment decision and sales pitchThis investment takes a shorter time for decision making since it involves an individual investor.Venture Capitalists take a longer time to make the investment decision since they have to address several stakeholders with differing interests. Hence, it is tougher to convince the venture capitalist for the investment decision.
Rate of return potentialThis 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.

Conclusion

Both angel investment and venture capital are significant drivers of economic growth since they 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 while starting a new business.

This article has been a guide for Angel investment vs. Venture Capital. Here we discuss the top differences between them and infographics and a comparison table. You may also have a look at the following articles –

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