Venture Capital vs. Angel Investors

It is true that there are several similarities between venture capitalists and angel investors. Both are actively looking for investment opportunities and therefore they make good contacts for the ambitious entrepreneur who is seeking capital to grow his/her startup. However, there are differences between the two which will alter the process of recruiting funds from these types of investors.

Angel Investor: An angel investor is a high net worth individual who may invest in startups using personal funds. Sometimes investing in startups is the core operation of the individual. Other times, an angel investor may have more of a passive approach to investing. On occasion, angel investors will network and create angel investor groups.

Venture Capitalist: A venture capitalist is a partner in an organization known as a venture capital firm. The firm is comprised of limited partners, who contribute their own capital into a fund which is then managed by the general partner. The LPs and GPs, as they are often referred to, will actively source deals and collaborate on operation of the fund.

In order to get a more specific understanding of the differences, let's take a look at how each type of investor operates in different key areas.

At what stage to they invest? Angel investors typically participate in seed funding, providing early stage capital to startups who may not have any existing operations to speak of. This capital is used to get office space and build platforms, often leading to the first few customers of the startup. Venture capitalists, on the other hand, prefer to invest in startups which already have an existing client base. They are looking to provide capital that will bring a startup to the next level.

How much do they invest? Since angel investors are typically getting in on the ground floor, they are less likely to risk significant capital. A lot of their funds will go towards developing a "proof of concept" which, if successful, will go on to form the basis of a business operation. However, many times these concepts do not pan out, in which case the angel investor loses all capital invested. Expect an angel investor to contribute around $25-100k. Venture capitalists, who are typically better funded and only looking at deals with existing customers, are likely to invest far more. Often, venture capitalists will contribute in the range of $1-10MM on a Series A.

How actively do they get involved? The differences aren't as well defined in this category. Typically, both angel investors and venture capitalists will want to be actively involved in the startup's operation, in order to ensure that their interests are being represented. The degree of this involvement can vary from firm to firm, and from investor to investor. However, you can bet that both types of investors will want a heavy say in the operations of your startup.

Who are the decision makers? Unless they are part of an angel network, most angel investors will make the decision to invest (or not) on their own. With the exception of possible intervention from their spouse, the angel investor will be ready to invest once you have demonstrated a convincing and diligent overview of your startup. Venture capitalists are typically more organized entities, and therefore they will conduct comprehensive internal due diligence. You may start by approaching an LP who will then take your idea to the board for a collective review. Before any capital is contributed to your startup, the venture capital firm will conduct a thorough joint analysis and leave the investing decision to a vote.

Key takeaways: Before you begin prospecting for capital, first evaluate the stage of your startup and the amount of funding you need. This amount should not be arbitrary; investors will want to know exactly what you intend to use their money for, down to the last dollar. Once your objectives are clear, you should decide whether you need to contact angel investors, venture capitalists, or both (this is not unheard of). Then, write your elevator pitch and start reaching out to a qualified list of potential investors.