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Angel Investors vs Venture Capitalists: Where Should One Secure Funding?

Understanding the differences between the types of investors in this venture is essential to make the best financial decision for one’s growing business entity. While getting investments from friends and family might be helpful, a start-up company may need additional capital (Funding) to set up the business and run smoothly. Many companies consider angel investors vs venture capitalists (VCs) alternate funding sources. However, businesses should be aware of a few differences in their approach.

Depending on the business’s stage, start-ups or other small businesses can take Funding from an angel investor or venture capitalist (VC). Therefore, this article helps to gain knowledge of what an angel investor or venture capitalists is and the difference between angel investor’s vs venture capitalists. Additionally, get to know which is better for the business, angel investor or venture capitalists and where the fund will secure more.

Angel Investors Vs Venture Capitalists

The investors, either venture capitalists or angel investors, want to invest their money into start-ups or small-scale businesses. Both the investors are the actuary who calculates the risks before investing in any business to earn a good return on investment.

Angel Investors Vs Venture Capitalists is a fair comparison as there are some differences between them. But before going deep into this, let’s understand the meaning of an angel investor and a venture capitalist.

Angel Investor

It is also called a seed investor, private investor or angel funder. An angel investor is an individual who has a high net worth capital and helps start-up companies or entrepreneurs by investing in their businesses in exchange for some amount of equity stake in their company.

The investment that investors provide to a business can be a one-time investment to help the company to shape its business and carry it through its difficult early stages.

Currently, many investors invest online through equity crowdfunding or as an angel group, where two or more individuals pool their money to invest in start-up companies.

These investors are a part of the business sector and are mainly found in the below-mentioned professions:

• Crowdfunding websites allow individuals to invest adequate amounts of money in exchange for future profits or returns, but the business should be successful.
• Business professionals and individuals in these sectors include legal, accounting, medical and financial.
• C-level business heads know what it takes to manage a successful firm.
• Successful business people and small entity owners who have already started and working in profitable businesses can invest in start-ups with promising futures.
• Investors who invest in small enterprises or fund microfinance institutions.

Venture Capitalist

It is a type of private equity and a form of financing that investors give to start-ups and small entities strongly believed to have a high potential to grow in the future. Generally, Venture capital comes from well-off investors, investment banks, and other financial house.

Although it does not always provide help in the form of investment, it may also guide through its managerial or technical skills. Venture capitalist generally allocates the investment to small companies with exceptional growth potential or overgrown companies that appear poised to continue expanding.

Venture capitalists provide Funding based on the lifecycle of the business (in which phase the company is right now). Primarily, they invest in established companies with high growth potential for the future and clear objectives. 

After understanding the meaning of angel investor and venture capitalist, further get to know the disparities between Angel Investors Vs Venture Capitalists.

Angel Investors Vs Venture Capitalists: What’s the difference?

For comparing Angel Investors Vs Venture Capitalists, we need to differentiate between these two concepts;

Angel investor	Venture capitalist
An angel investor is a recognized investor who invests money in start-ups or small businesses. The funds investors provide to the business entity may be invested once to help the company shape its business and carry it through its difficult early stages.	A venture capitalist is an individual or a firm that invests its money in a small business entity. Generally, these investors pool the money from investment firms, large companies, and pension funds. Primarily, Venture capitalist do not use their own money for investments.
Angel investors mainly invest in early-stage businesses.	Venture capitalists provide finance to those businesses that are already in operation to mitigate their risk of losing investments.
Angel investors may expect a return between 20% and 25%.	Venture capitalists might expect a 25%-35% return on investment.
Angel investors are primarily there to offer financial support. Their involvement depends on the company’s wishes and the angel’s inclinations.	A venture capitalist is looking for a strong product or service with a substantial competitive advantage, a talented management team and a broad potential market.
Angel investors act as an adviser or a mentor. They might offer suggestions or advice about how businesses can earn more returns running, help business form connections with others such as lawyers, accountants, and banks, and help with decision-making.	Venture capitalists might require businesses to establish a Board of Directors and give them a seat after investing.

How to present the proposal to an angel investor

An angel investor^[1] is more interested in start-up’s ideas or team than its return and potential growth in the future.

Present the proposal to an angel investor on what make company to start this business, but also pitch the key factors of the business such as the size of the business, the product or service which the business provided, threats and, if applicable, company current sales.

How to present the proposal to a venture capitalist

When pitching a venture capitalist, present the company’s solution to ordinary difficulties consumers face and how the business can solve this.

Present a five-year projection of the company’s income and expenses during pitch meeting. The business aims to show investors that their long-term return on investment mitigates their short-term risk.

Angel investors Vs Venture capitalists: Choosing the right type of Funding

Choosing which right, Angel Investors vs Venture Capitalists for a company, depends on the business type, size of the business, requirements of the entrepreneur, and to which stage the company belongs. While there’s no correct answer when considering venture capital vs angel investment, it depends upon the business type and size. Where the fund will secure depend upon the nature of the businesses.

When evaluating funding options for their business, entrepreneurs must consider the company’s immediate and long-term requirements, the level of support or guidance needed from the mentor, and the percentage of equity holding offers and give control to the founder’s wish to maintain moving forward.

Additionally, Businesses may want to examine some essential things in determining which Funding is better for them.

Consider the below mention points also:

• Most angel investment funding is not debt for the business. Thus, if company is on track and earns a good amount of profits, the business isn’t obligated to return the investors’ money. This may help because, due to this, investors have pressure to analyse the company, further confirming the idea’s potential or risk.
• Venture Capitalist Firms can be strong and aggressive when invested in the business”. Therefore, if they invest in a particular company, they put high pressure on immediate results, and the lead has a significant say in many important decisions. This doesn’t mean the entrepreneur loses control of their company, but their investment stake will undoubtedly be heard. After all, they are managing the funds of their wealthy clients.
• While the investors investigate the company and idea, entrepreneurs should also do their due diligence on who allows investing in the company.

Angel investors and venture capitalists are not only options to seek funding from them, but the companies can also secure their Funding from other platforms. Business loans and crowdfunding also finance start-up businesses or small businesses. Many entrepreneurs fund their ventures on their own. But suppose the company still need Funding for their business. In that case, the company’s search for venture capitalists or angel investors who believe in their business is a fantastic way to get an investment, get the idea off the ground, and possibly gain some mentoring and connections.

Conclusion

It will depend on where the company stands in the process. Do the company need more investment to kick things off, or is the company more established and can easily handle the extra pressure of working with a Venture capitalist firm? It will depend upon which type of Investor Company will pitch their proposal. At least, there are a few things the company must consider before choosing the investors, such as the company’s profitability and size and the potential market growth. Not every company become a “Unicorn”. Small and medium companies are also profitable and give their investors reasonable returns. Hence, think about what the company are trying to accomplish and where the company fit into the funding landscape. The debate between an angel investors vs venture capitalists has to be decided by the entity whilst considering all the arguments above mentioned.

Read Our Article: Difference between Angel Investors and Venture Capital