written by | June 8, 2022

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What is the Difference Between Angel Investor and Venture Capitalist?

While the two groups share similarities, their objectives and strategies differ considerably. Both types of investors seek to generate high returns for their investments. 

Angel investors typically look for projects with a high potential for future revenue and enterprise value, with the ability to independently return their entire investment. While many startups fail to meet these criteria, their unique business models may attract a VC.

This article will examine the difference between an angel investor and a venture capitalist.

Did You Know?

Angel investing is mostly the main source of funding for numerous startups who find it highly appealing in comparison to other forms of funding and more predatory. The support which angel investors offer startups fosters innovation in economic development.

Venture Capital and Angel Investor: Overview

While both types of investors invest in early-stage companies, angel investors typically have experience in the industry or connect to people in the field.

Angel investors tend to avoid direct involvement, while venture capitalists demand a high level of involvement in the business, including a seat on the board of directors. As such, a startup should consider seeking the support of an angel investor before reaching out to a venture capitalist.

Another distinction between an angel investor and a venture capitalist is their investment amount. Angel investors are high-net-worth individuals who invest their personal funds to help entrepreneurs launch and grow their companies. 

While some angel investors are family members, most are professional investors with a given minimum amount in assets. In most cases, angel investors will invest less than ₹50 lacs into a business. However, if they pool their funds with other angel investors, they may invest much more than an individual.

Difference Between Venture Capital and Angel Investment

Basis for Comparison

Venture Capitalist

Angel Investor

Meaning

A venture capitalist (VC) can be described as an investor in private equity who lends capital to companies with high growth potential in exchange for equity stakes.

Angel investors are people who offer promising start-up businesses funding by offering a share of the company, generally as royalties or equity.

What is it?

Professionally managed public/private firm.

Individual investors(often successful businessmen(.

Money

Pools money from funds, foundations, corporations, and insurance companies, to invest.

Invest their own funds.

Investment

The investment made in the pre-profitability business.

An Investment made in the pre-revenue business.

Post Investment role

Strategic

Active

Investment size

Comparatively large

Less

Screening

Undertaken by an outside firm specialised in the same or an experts' team.

Undertaken by the angel investor as per their own experience.

Approach to agency risk control

Principal-agent approach

Incomplete contracts approach

Stresses on

Investment criteria as per initial screening of investment opportunities.

Investment criteria as per ex-post involvement.

Also Read: How to Choose a Business Structure? - Types and Comparison

Definition of Angel Investors

Angel investors are people who offer promising start-up businesses funding by offering a share of the company, generally as royalties or equity.

One question you may be asking yourself is, "Who are Angel Investors?" The answer is a little more complicated than just identifying a name on a business card. 

While there are many different types of Angel investors, one thing that should be common among them is that they're people with experience investing in companies. They're often people in the investment industry who make investments in companies that would be impossible to secure through a VC fund.

There are two main types of Angel investors: active and passive financiers.

Active financers

  • Active investors act as advisors and protect the company's equity.
  • They invest small amounts but often have a wealth of industry knowledge.
  • Active Angels are people who make investments out of their passions or are well-connected in the industry.
  • An active Angel can be an asset to a start-up.

Passive financers

  • Passive Angels may only invest in companies that have a chance to make a profit. 
  • Passive financiers leave the company management to the entrepreneur. Passive financiers generally do not want to be active critics; active investors may want to be involved in the company's management.

There are even angel syndicates and crowdfunding platforms, and you can find one in your area by checking out the list of potential investors.

Definition of Venture Capitalists

A venture capitalist (VC) is an investor in private equity who lends capital to companies with high growth potential in exchange for equity stakes.

There are a variety of roles in a venture-capital firm. Each focuses on a different industry, region, or type of technology. Some focus on software companies, others on businesses within a hundred miles of their office, and some only invest in companies with less than ₹10 lacs in earnings.

Regardless of their role, investors should know what types of companies these firms invest in and what they expect. The differences between the roles and the companies they fund will make the process easier to understand.

Most venture capital firms have a hierarchy:

Associate-level investors are the most junior, followed by associates, analysts and managing directors. Senior partners, however, may be the most influential individuals in a firm.

  • Some associates work in operations, sourcing and analysis.
  • Other staff work directly with the principals, but most venture firms prefer to work through associates and directors.
  • You should try to meet with someone who has authority over you and your company's future.

VCs tend to invest in young, high-growth companies with a low chance of failure. Many of their investments, however, have high failure rates. Some VCs question their decisions to take money from certain LPs based on ethical concerns. 

However, this doesn't happen all the time. They usually choose companies that have product-market fit and the potential to scale. A successful start-up may be the outlier that makes the venture capitalists' investments worthwhile.

Key Difference Between Angel and Venture Capital

Although the two kinds of investors are often discussed as a pair, the differences between angel and venture capital investors are significant enough to merit an examination. This is particularly true for small-sized businesses that aren't sure about whom to approach. Let’s know the key points about angel investor and venture capitalist differences:

Investor Type

This is a crucial investment strategy for venture capital and angel investors. Angel investors are wealthy people who use their surplus funds to invest in the businesses they like. Venture capitalists, on the contrary, are employees of large risk capital corporations that use funds from third-party investors to invest in new or rapid-growing ventures.

The Stage of the Company

In general, angel investors tend to invest in start-ups and companies that are only beginning to get involved in market research and technical development. Contrary to this, venture capitalists are not a great source of funding for start-ups unless they are in exceptional circumstances, such as very popular or successful founders. They typically invest in businesses which are established in their stages of growth.

Time of Investment

Angel investors and Venture capitalists are a part of the equation at various stages of a small-sized business's lifecycle. Venture capitalists tend to invest in established businesses to safeguard their wealthier clients' money. 

In contrast, business angels concentrate on promising businesses they'd like to turn into a profitable businesses with a fair share. This is why the fact that angel investors generally have more risk compared to venture capitalists.

Also Read: A Guide on Company Registration Process

Involvement In The Business

After investing in the venture, both angel investors and venture capitalists play the game and look for the highest returns from their investment. Although many angel investors function as mentors, few are expecting to be involved directly in the company's running. 

On the other hand, venture capitalists aren't looking to serve as mentors, but they expect to be actively involved in the business's decision-making process. They'll have more influence and will expect business owners to allow them to sit on the executive board.

Amount Invested

Another difference between angel investors and venture capitalists is the amount of capital that the two types of investors will inject into small businesses. Angel investors typically invest less (usually less than ₹50 lacs) in business because they're typically investing their funds. Venture capitalists can make investments in the crores.

Conclusion:

Depending on where you're in the process, whether you require a seed fund to get things started or are you already established and capable of handling the added responsibility of working with a VC firm? 

This will decide what type of investor you'll target. It all is a matter of the following factors: attraction, profitability and market size. Not every business or idea dreams of being a "Unicorn". 

Smaller businesses can be profitable and yield decent returns for investors. So, think about the goals you wish to accomplish and how you are in the investment environment to determine the best option for you - a venture capitalist or an angel investor. 

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FAQs

Q: How much do VCs get paid?

Ans:

Generally, VC associates are able to make a salary of ₹6-8 lacs per year.

Q: What is a Venture Capital investor?

Ans:

A venture capitalist (VC) means an equity investor, which offers money to organisations with high development in exchange for the equity stake.

Q: What does an Angel Investor do?

Ans:

If we talk about venture capital and angel investors meaning, angel investors are basically private investors that focus on financing ventures that have small businesses in exchange for equity.

Q: What are differences between Venture Capital and Angel Investor?

Ans:

Angel investors are affluent people that invest the money they have into new startup ventures. On the other hand, venture capital (VC) investors come in to work at the organisation’s risk of money. Basically, They invest other people's capital.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.