than when entrepreneurs seek to raise venture capital (VC) funding.
If you are looking for ways to gather money for your small business or startup or are just getting informed about different funding options, you have come to the right place. Venture Capital (VC) and angel investing are Two of the most popular funding possibilities. While both might sound similar and things can get confusing, some key differences need to be considered between venture capital vs angel investing.
Today, we will look at the main distinctions between the two. This piece should help every small business owner or startup entrepreneur to choose a type of investment that will suit their needs and understand the difference between venture capital vs angel investing.
What to expect if you choose a Venture Capital (VC) firm
VCs provide funding to startups and early-stage companies in exchange for equity. These firms follow the mentality of “go big or go home”, using high-risk investments to generate considerable returns. That doesn’t mean they are not risk-averse. VC firms do their research and only invest their money if they believe in that specific business.
It is essential to remember the fact that VC firms follow specific criteria when choosing their partnerships. They want companies with strong management teams that employ a coherent business model and focus on markets with the potential for scalable growth.
The money that you receive from venture capital firms comes in different rounds. Each stage of funding is larger than the one before, and it is used for different purposes. For example, the first round is called the “seed” funding stage and is mainly for developing a prototype. Round A follows and focuses on the scaling of the business while round B is for expanding into new markets. There can be a round C, D, E, etc. depending on the stages of the company’s development.
What to expect if you choose Angel investing
The main difference between angel investors and venture capital firms is that the former are individuals who invest their own money into startups and early-stage companies. A difference between venture capital vs angel investingi is that angel investors are not professional investors like venture capital firms and prefer to invest smaller amounts of money. But that doesn’t mean they are not worth pursuing.
Many companies are not ready for venture capital and should focus on attracting angel investors. Remember that it is hard to prepare for angel investors since they have their investment criteria. Your company might not spark interest from some of them.
Investment size and risk vary for both options
This is one of the main differences between VC and angel investing. As mentioned before, venture capital firms make considerable investments. You can even get millions of dollars from venture capital firms in just one funding. On the other hand, angel investors prefer to invest between 25.000$ and 100.000$. Rare is the case when they put in more money.
Because of the volatile sums of money, the risk will also vary. Venture capital firms invest sizeable amounts of money, so they risk a lot more than angel investors. But here might be a catch. VC firms will prefer to assure themselves that the investment is safe, while angel investors don’t employ the same level of research. If they lose their money, it will be just a minor part of their portfolio.
Venture capital and angel investors aim for different returns on investments
Due to the massive sums they invest, you can expect venture capital firms to prefer higher returns on investments. From our knowledge, they usually aim for 20% - 30% ROI. Now do not expect that they would want that return in a year or two. VC aims for higher periods, usually between 5 and 7 years. On the other hand, angel investors prefer 10% to 20% ROI. They also expect the return to come in a higher time frame.
If you have a startup, you need to balance the differences between these two types of investors and decide what is best for you. Take everything into consideration
What you need to keep in mind is that…
Both venture capital & angel investing are significant options for every startup and early-stage company on the lookout for investors. On the surface, both might seem similar but the key differences come from the risk and return areas. In the end, your choice should be made based on your needs and goals.
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