Both venture capitalists (VCs) and angel investors have important roles to play in the worlds of business and investment, both possessing merits as well a additional consideration in each and every case.
An angel investor is a wealthy individual who invests their own money into companies. They can also be a group of wealthy individuals who invest together.
A venture capitalist (VCs) are the employees of a venture capital firm that invests other people’s money into companies.
What exactly is an angel investor?
An angel investor is typically a high-net-worth individual who invests their wealth into the early stages of new start-ups. They usually provide this funding in exchange for convertible debt or equity and they may use a private bank to hold their funds (source: Redstone Private Banking).
The wealth of an angel investor can come from a number of sources. They might have sold their own start-up, or perhaps they’ve gained a lot of wealth in another industry.
An angel investor does not need to be an accredited investor, although lots of angel investors are. In order to be an accredited investor, the investor must:
Have made at least $200,000 a year (or $300,000, for a couple) for the past two years and must have the expectation of making that amount again.
Have a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
This is the definition according to the Securities Exchange Commission (SEC).
Angel investors are often willing to take bigger risks and venture capital firms which could be good news for a start-up. They also come with a lot of knowledge that can support young start-ups.
The potential disadvantage of working with an angel investor is that they will want a stake in your business. They will also likely expect to have some control over the way the business is run.
Also important to understand is that a family office falls somewhere in between an angel investor and VC, in that family offices could provide more investment than an angel, but with some caveats, but they may not be able to provide quite as much funding as for example an institutional investor (source: OMBA Investments).
What exactly is a venture capitalist?
Venture capitalists tend to invest their finances in start-ups that are high risk and have the potential for exponential growth.
The big advantage of getting your funding through a venture capital firm is that if your start-up goes under, as many do, you usually won’t be liable to pay that money back. The money is an investment rather than a loan and you are not liable to pay back the money you are given.
Venture capital investments are also often big ones, so venture capital is a good option for start-ups that are looking to scale big quickly.
Venture capitalists can also offer a lot of business knowledge to a start-up. Firms tend to be well connected to other businesses that could support a start-up, as well as other investors and potential employees.
What are the differences between VCs and Angel investors?
- Willing to take bigger risks on start-ups
- Often has business connections and valuable knowledge
- Will want a stake in the company and expect some control (will be decided during the investment)
- Usually does not require you to pay back your funding
- Often less willing to take financial risks
- Large investments
- No need to pay back your funding
- Connections to other investors and business partners
- Not ideal for those looking to run their startup forever
- Will expect to take a stake in the business in return for their investment
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