Venture Capital vs. Angel Investors: Which is right for you?
Differences in Venture Capital vs. Angel Investors
Before I lay out the advantages and disadvantages to working with each group it is important that we set the foundation for understanding their differences.
Venture capital firms generally manage the money of other investors and invest that money into high-growth potential startups. Although their investing preferences can fluctuate a little based on deal flow, in general they don’t invest in ideation-stage startups. Instead they tend to prefer investing in a “startup” that has a proven revenue stream. Thus, they are later stage investors when compared to angel investors.
Angel investors are individuals with a higher net worth who like to invest in startups. They generally do so in order to promote entrepreneurship in their own communities and/or to further diversify their investment portfolio. Many angel investors are willing to invest at the pre-revenue stage. Thus, they are early-stage investors.
In many instances, because of the synergy between the two groups, venture capital will invest in a startup after angel investors have reached their cap with the business.
The expectations that each group has is slightly different. Although there are similarities. Such as desiring a good return on their investment.
Advantages/Disadvantages of Angel Investors
Some advantages of working with angel investors include:
- Some angel investors are more altruistic with their investing decisions. While no one likes throwing money away some angels are willing to see their investments as charity.
- They are more willing to invest in a startup purely based on the idea and little traction to-date.
- Landing an angel investor (a lead investor) is often a signal to other investors that they should pay attention to your startup.
Some disadvantages include:
- They may be new to startup investing and have unrealistic expectations or a limited understanding of how startups operate.
- Some angels invest as part of a syndicated group and therefore they may not be making individual investing decisions.
- They amount of capital that some angels are willing to invest can be small. So, you might need multiple angels even in your early funding rounds.
Advantages/Disadvantages of Venture Capital
Some advantages of working with venture capital include:
- Statistics show that once you get to a certain VC funding round that your chances of having a successful exit increase dramatically.
- Since venture capitalists invest in startups for a living they are well-versed in what it takes to be successful.
- They invest larger dollar amounts.
Some disadvantages include:
- The due diligence process can be lengthy and intensive.
- VCs often include conditions as part of their investments such as seats on your Board of Directors and other covenants.
- Compared to angel investors many venture capital firms are less active in the daily operations of your startup.
The main point here is that you will most likely not have to make a decision about which group to work with. In many instance, particularly with high-growth startups, you will end up working with both angel investors and venture capitalists as your business and your funding needs grow. The key is target the right investors at the right stage of the growth phase you are in.
Until next time, I hope you “find your voice”.