Do you know the difference between an angel investor and a venture capitalist?
Among the many differences, there are four that stand out as critical for entrepreneurs.
1) Management/Advisory Participation
Almost without exception, when a venture capitalist makes an investment in a startup, it comes with strings attached: they require at least one seat on the Board of Directors, a sub-organization within a company that ensures that investors? money is managed well. They tend to be very involved in the operations of the business. Angel investors will occasionally desire this degree of participation, but not nearly to the same degree as venture capitalists. This type of participation is usually a good thing; investors fund companies in industries where they feel they have expertise, and they use this knowledge to provide advice and assistance in growing your business.
2) Sourcing the Cash
Most angel investors will be taking the money right from their own bank accounts, or from family accounts. They tend to be wealthy individuals seeking investments so they can grow their own fortunes, and this gives them flexibility. They can play with their money more and can decide what they want to invest in at any given time. Pension funds or networks of wealthy people tend to fund the ventures taken on by a venture capitalist. They are often hired by others to make sound investments that bring about profits for everyone. A venture capitalist may have more money to throw around, but they will also have to meet the requirements of whoever is funding the investment. They may only be free to invest within certain industries, for example.
3) Expert or Amateur?
Another key difference in these two types of investors arises from their degree of professionalism. Without exception, venture capitalists are professional investors who invest money vocationally, as their job. The process of joining a venture capital firm is extremely selective and arduous. Angel investors vary a great deal in their degree of professionalism and experience. On one end of the spectrum, they can be equally professional and experienced as venture capitalists; on the other, they may be casual investors who fund startups as a hobby.
4) What Can They Invest?
This is perhaps the most striking difference between angel investment and venture capital investment. Venture capitalists tend to invest significantly larger amounts of money than do angel investors. For example, a typical investment by a venture capital firm ranges from $5 to $10 million, with $2 million as a bare minimum. The reasoning behind this is that they prefer a very strong return (40%, for example) on a large investment to an outstanding return (perhaps 100%) on a small, angel-sized investment. Angel investors can fund companies in any amount, but it typically ranges from $50,000 to $1 million.
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