Making the best financial decisions for your growing business or startup requires a clear understanding of the nuances for different financing options. Here, we'll talk specifically about the differences between two of the most common sources of funding, angel investing and venture capital. Both can be advantageous options if you are beginning the steps to secure a first round of funding, or are seeking additional dollars to fuel and scale continued growth.
For founders and business leaders looking to make the most informed decisions possible, dive into this essential guide on angel investing vs. venture capital. Learn their similarities and differences along with the pros and cons, to help you choose and acquire the right capital needed to pave a successful path for your business.
Angel Investing vs. Venture Capital: The Similarities
Never in history have we seen so many funded startups and so much cash to go around. In this cash-rich environment, founders have the upper hand in choosing funding resources that best align with their goals.
Angel investing and venture capital are two of the most common sources for business funding. Both types of investments:
- Fund businesses they believe have the potential to succeed
- Take calculated risks in the hopes of earning a good ROI
- Typically gravitate towards startups in the technology and science fields
Angel Investing vs. Venture Capital: The Differences
There are five key differences between angel investors and venture capitalists:
1. Sources of Funding
Angel investors usually comprise individuals who:
- Use their personal savings to fund the investment. They are typically influential people (family members, friends, acquaintances, etc.) who believe in a business and are excited to gain equity in a business.
- Have a total net worth more than $1 million.
- Possess intimate knowledge of the industry they are investing in—this is beneficial, as they can help expand your network, make valuable introductions, and offer educated guidance on scaling, product development, and any other challenges that might come up.
Also known as limited partners, venture capitalists are a firm or an investment company. More specifically:
- They include a group of investors rather than a single person.
- Their funds can come from individuals, corporations, pension funds and foundations, or other connected institutions.
- They typically follow a process-driven approach—in addition to the group of investors, venture capitalist firms may also involve ad-hoc employees to help manage the moving parts of the investment (e.g. investigation in your business model, products, operating history, etc.)
2. Business Stage
Angel investors most often invest in early-stage startups. This allows businesses to receive the funds they need to build traction and grow.
Meanwhile, venture capitalists typically invest in businesses in the later stages. Venture capitalists want to see a genuine opportunity for growth, with previous company expansion to prove it. Typically, the only time venture capitalists would invest in early-stage ventures is if the founder holds a track record of launching successful companies in the past.
3. Size of Funding
As angel investors are involved in the early stages of a business, they invest around $25,000 to $100,000. They understand early-stage startups carry high risk, so they place small bets with the hopes of earning a high return in the future.
Venture capitalists can afford to invest a larger amount with lower risk, as they generally invest during the later stages of a startup. As such, their investments sit in from three to 100 million dollars.
4. Return on Investment
Venture capitalists expect a higher return rate than angel investors:
- Angel investors generally receive a 20% to 25% return rate.
- Venture capitalists may expect a return rate of 25% to 35%.
These rates may go up depending on how your business performs over time.
5. Level of Involvement
Investors offer more than just capital. They protect their investment by offering their time and experience to help your company grow.
- While most angel investors acquire partial ownership of the company, they generally avoid due diligence since the money they invest is their own. But research shows angel investors who provide 20 hours of service are five times more likely to earn a positive return.
- Venture capitalists, on the other hand, prefer to be more involved in your business. They do this so they can make the most of their high investment.
The Pros and Cons of Angel Investing and Venture Capital
Investments from angel investors and venture capital groups are ideal for getting the right amount of capital to grow your startup. However, there are of course of pros and cons you should be aware of before making your decision.
Angel investors can be the linchpin your organization needs to launch your business. But there are some potential drawbacks you should also be aware of:
- They are more open to taking risks: Angel investors are more willing to take risks than venture capitalists because they are investing their own money rather than their institution’s money.
- They can provide expertise and guidance: Due to their extensive knowledge in your industry. They can provide you with sound business advice and mentor you through growth stages.
- You are not required to pay the money back: Angel investors choose to invest their own money in your business. Therefore, in the event your business sells or closes, you are not required to pay back your angel investors.
- They may want a high equity amount: Because angel investors become involved in the earlier/riskier stages, they may want a large portion of your business’ equity. For the business owner or leader, this can mean less control over your startup. You can avoid this by establishing clear expectations early in the investment process.
- Funding may be slow: Since angel investors use their own money, you may not have a consistent supply of funding. Therefore, you may be low on finances during a critical period of your business. Consider having your angel investor(s) provide funding when you achieve specific milestones to avoid this issue.
Venture capitalists can provide your company with substantial growth capital. But what should you expect from these deals?
- Access to large amounts of funds: Venture capitalists often work for financial institutions, which opens the door to large amounts of investment capital.
- Access to expert advice on how to build your business: Venture capitalists are increasingly offering portfolio companies valuable, ancillary services beyond capital, work with you to improve and build your startup. The financial institutions can provide you with the network you need to build your credibility.
- You don’t need to pay back the funds: Like angel investors, venture capitalists do not require you to pay back the funds. But you may have to provide returns through their share of profits.
- You can lose control: Venture capital investment costs equity in your business. Therefore, you may risk losing authority in certain company decisions. You can remedy this by establishing clear expectations early on and/or appointing venture capitalists as board members.
- Funding can be a long process: Venture capitalists can afford to be picky about their investments. As noted earlier, they want to see a genuine opportunity for growth, with previous company expansion to prove it. Therefore, you may spend a lot of time pitching your startup to various firms and attending follow-up meetings.
When Is the Best Time to Use Angel Investing vs. Venture Capital?
Here’s a quick checklist that outlines key situations warranting angel investing vs. venture capital.
When to Seek an Angel Investment: Seed Funding
Look for angel investors in your seed funding phase. Here are some signs to know you are at this stage:
- You’ve already acquired and capitalized on pre-seed and startup funds.
- You’ve done the market research to validate your product.
- You have a reliable workforce.
- You have an organized record of financial wellness.
- You’ve developed a unique marketing plan/strategy.
When to Seek Venture Capital: Series A and Series B
Series A and B are where the growth accelerates, usually meaning you’ve developed a refined product and are looking to expand. Here are some signs you’re ready for venture capital:
- Your product has already proven market potential/success.
- You’ve established a loyal, niche customer base.
- You’re ready to grow your business (after it’s proven to be successful).
- You want to expand into different product offerings/markets.
- You’ve started building a talent strategy to hire qualified executive leaders to effectively build out strong teams.
Grow Your Business with Hunt Club
Building the right team can be the difference between receiving funds and being passed on. Partner with Hunt Club to hire key talent that will help you pursue the best investments for your growing startup.
Whether you are looking to scale your startup or invest in one, Hunt Club’s platform offers exclusive access to the world's top-tier talent.