When it comes to investing in business equity, the two main forms of investors are venture capitalists and angel investors. Both can be beneficial to finance your business, and they both can offer you ongoing guidance as you continue to build and grow your business.
There isn’t a hard and fast rule as far as when to use one over the other, but, in general, venture capital firms invest in larger companies that are established, while angel investors invest in smaller companies that are still getting off the ground.
|Venture Capital||Angel Investor|
|Investment average||$7 million||$300,000|
|Ownership expectations||Seat on Board of Directors||Day-to-day operation involvement|
|Size of business||Larger, established||Small, startup|
What is venture capital?
Venture capital (VC) firms invest in established companies that they believe have long-term growth potential. As a startup, you likely won’t be able to attract the interest of a venture capital group until you’ve been able to demonstrate that you have a viable business that can make an investor a lot of money.
How does venture capital work?
Venture capitalist groups are made up of investors and companies who invest, on average, $7 million in a company. They make big investments in expectation of at least a 20 percent return. Unlike angel investors, who invest their own money, venture capital firms pool money from multiple sources.
With venture capital funding, the more money you get, the more ownership the venture capital firm gets. This means you’re essentially swapping equity in your business for cash up front. Venture capital firms tend to have deeper pockets than individual angel investors, which means they are better for larger businesses with long-term potential than for smaller startups.
Unlike angel investors, venture capitalists won’t want to be involved in the day-to-day activities of your business. They will, however, expect a seat on the board of directors. They’ll also expect a higher return on their investment, usually around 25–35%.
What is an angel investor?
An angel investor (also referred to as a seed investor, business angel, private investor, or informal investor) is somebody who has the money, time, and knowledge to invest in your business. They can invest in your business at any point, including before you even make any money. Angel investors generally use their personal money to fund a business.
Who can be an angel investor?
An angel investor can be anyone with the money to invest in your business. It can be someone in your social circle, including your family, or it can be someone who you meet through networking channels like Raising Capital Club. The only qualifying criteria to be an angel investor is that the investor needs to be accredited through the Security Exchange Commission (SEC).
What do angel investors do?
Angel investors do two things: give businesses money and provide guidance for how to move the business forward. Angel investors frequently want to invest in small businesses because they like the aspect of building a business. They’re eager to share their knowledge and experience to help new business owners succeed.
If you work with an angel investor, expect to hand over some of the decision-making power to them. This can be a huge benefit if you match yourself with the right angel investor, but it can cause problems if you only focus on the amount of money someone is willing to invest.
Angel investors usually don’t expect a fast ROI, but they do expect one eventually, usually in the neighborhood of 20–25%.
If you’re just starting out, you probably don’t want to waste your time trying to get the attention of a venture capital firm. Instead, look for angel investors who can invest less money and give you more day-to-day guidance to help you build your business. If your business is well-established, and you think it has genuine growth potential, then a VC firm can be just what you need to get to the next level.
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