Difference Between Angel Investment and Venture Capital
Angel investments are the investments which are made by informal investors having the high net worth whereas in case of the Venture capital, investments are taken from the venture capital firms that are funded by the companies that pools funds from the different institutional investors or the 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 own funds. Angel investors are generally former entrepreneurs who enjoy taking the risk, sometimes even before commercializing the idea of the 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 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.
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Angel Investment vs. Venture Capital Infographics
Let’s see the top differences between angel investment vs. venture capital.
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Key Differences
- Angel investment is funded by investors who are usually high net worth individuals (HNIs), but 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.
- 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 capitalists to justify the investment decision to their investors.
- Angel investorsAngel InvestorsIndividuals who invest in new firms and start-ups are known as angel investors. In exchange, they demand equity or debt. It's more of an informal investing approach in which the company doesn't have to go through a lot of compliances.read more like to provide mentoring guidance to the start-up owner. However, Venture capitalists hold a seat in 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
| Criteria | Angel Investment | Venture Capital | ||
| Meaning | In 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 Level | This 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 size | Investment 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 with a venture capitalist is much higher. | ||
| Type of investment | The type of investment is through Equity and /or SAFE (simple agreement for future equity), wherein the invested business gives the angel investor the right to buy shares 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 pitch | This 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 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. |
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.
- 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 streamRevenue StreamRevenue streams refer to the different sources through which the company generates profit, such as selling the products, catering the services or offering a combination of goods and services to the clients.read more for convincing the investor.
- In contrast, while venture capitalists 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 growing firms, the firm would have to endure making decisions in conformance with a venture capitalist.
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