Angel investing is among the most reliable ways to make money - even double what you could make in stocks.
But when you do a quick Google search for "angel investing," more than 38 million results overwhelm you.
Yet, none elaborates what it is and how it differs from venture capitalists from an investor’s point of view.
An angel investor is an accredited investor. They use personal money to invest in small businesses. In return, the angel investor receives equity or convertible debt. You need a least a net worth of $1 million and an annual income of at least $200,000 to become an angel investor.
Most angel investors are families, friends, and small business owners.
Angel investors focus more on helping businesses more than profitability right away. So, their engagement terms may be more reasonable than venture capitalist terms.
Venture capitalists are people or groups of people who invest in high-risk startups. Later, the venture capitalist may choose to buy the company. Or buy a large number of its shares in the event of an initial public offering (IPO).
So, what is the difference between angel investors and venture capitalists?
Differences between angel investors and venture capitalists
The two are the most common investment alternatives and have common similarities. Whether an angel investor or venture capitalist, you cater to innovative startup businesses.
But, there are differences between an angel investor and a venture capitalist.
Let’s look at them.
1. How they work
Angel investors work alone and are sometimes known as business angels. They are individuals who invest their money in a startup. Angel investors are rich and influential people. They often invest in high potential businesses in exchange for an equity stake.
Investing your own money as an angel investor means you always have an inherent risk. Thus, look to invest in a business owner willing to give away part of their company.
Venture capitalists are a group of professional investors. Their capital comes from individuals, pension funds, corporations, and foundations. They can either be limited partners or general partners.
The limited partners provide capital for investment. General partners work with the founders and are responsible for the managing of the fund. They ensure their investee company’s growth.
The general partners provide investment expertise and asset management services—all in exchange for a management fee and significant profit participation.
2. Investment amounts
Angel investors invest between $25K and $100K of their own money, but they can invest more or less. One angel investor can partner with other angel investors and average more than $750K.
Venture capitalists invest much more than angel investors. They invest an average of $7M in a company.
3. Who they invest in
Angel investors specialize in early-stage businesses. They also fund late-stage technical development and early market entry.
Angel investors provide funds that kickstart a company and help it to scale.
A venture capitalist invests in early-stage companies and more developed for that matter. They also invest based on what they want to focus on. They are keen to invest in startups that show compelling promise and a lot of growth potential.
Venture capitalists want to invest in businesses with a proven track record. Businesses that can prove the potential to succeed. They then offer to speed up business growth.
4. Motivations and responsibilities
Angel investors provide financial support and provide advice if the business owner asks. They could also introduce them to important contacts, but are not obliged to do so.
Their involvement depends on their investee company's wishes and their inclinations.
But venture capitalists want strong products or services with a strong competitive advantage. They look for wide market potential and a talented management team.
A venture capitalist’s role is to help build a successful company and add real value. They help in establishing a strategic focus and recruiting senior management. They can also form part of a sounding board for the CEOs.
The main aim is to help a company make more money and become more successful.
5. When they invest
Venture capitalists and angel investors invest in businesses at different stages.
Angel investors invest more in startup businesses. They want to help them grow and become profitable - even before the company prooves itself. Because of this, it means an angel investor takes on more risk than a venture capitalist.
Venture capitalists invest in established businesses. They want to mitigate the risk of losing their investments.
6. Return expectation
The expected return for angel investors and venture capitalists also differ.
Venture capitalists expect a higher return on investment anywhere between 25% - 35%
Angel investors' expected rate of return is between 20% - 25%.
7. Involvement amount
Another difference between venture capitalists and angel investors is the investment.
Angel investors invest less money into a business compared to venture capitalists.
8. Due diligence
Some angel investors do not carry out any due diligence, and they are not bound to, given that the money is theirs.
But, angel investors should conduct some due diligence—that way, they are more likely to achieve a positive return.
Venture capitalists do more due diligence because of the fiduciary responsibility to their limited partners. They also spend an excess of $50,000 when researching their investment prospects.
Angel investors invest for a greater range of reasons when investing in startups. A return on investment is one of them. But angel investors also want to help less experienced businesses within their sector.
For venture capitalis, a strategic alignment is a common motivation. They want to align with relevant and emerging companies and financial returns.
But, it's no secret that the main motivation for a venture capitalist is the return on investment.
A venture capitalist's job is to find the best business, then help them make a lot of money.
Angel investors take a shorter time to decide on an investment than venture capitalists. Their decisions are quicker because they often work alone. They may also have a personal interest in the business.
They also invest personal money, so they have no obligation to third-party investors.
Venture capitalists evaluate their involvement with a business. Research, due diligence, and other aspects help them make smart inbestment decisions. All these take time.
What do you do once you invest in a business?
Whether an angel investor or a venture capitalist, you want business equity. You want some control in how the founder runs a business. You want to make sure you maximize your return on investment.
As a venture capitalist, you might want the company to establish a Board of Directors. You may want a seat in it after investing. You may also wish to mentor the business, although not mandatory.
But, as an angel investor, you mentor the business. You may suggest some strategies for running the business. You may help them connect with accountants, lawyers, banks and help with decision-making.
What are you looking for in a business?
Are you looking to act as a partner and a mentor like an angel investor? Or, would you prefer to invest like a venture capitalist and not become a mentor?