Angel investing vs. venture capital: What’s the difference?

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It’s no secret that you need funding to launch a start-up, and angel investing and venture capital are two of the most common sources. There are significant differences between these types of funding, and the right fit depends on both the characteristics of the inventor (you) and the terms of investments.

What is an angel investor?

An angel investor is someone that provides a large amount of their own money to an early-stage startup. Some angels invest independently, but often investors will join angel networks in which they pool funds to make larger investments. In exchange for this monetary support, the angel investor often receives equity or convertible debt. An accredited angel investor meets at least one of the two criteria set by the U.S. Securities and Exchange Commission (SEC):

  • Angel investors must have annual earnings of at least $200,000 per year for the past two years, with a strong likelihood of similar earnings in the near future. If the angel investor files taxes jointly with their spouse, their required annual earnings increase to $300,000.
  • They must have a total net worth of at least $1 million, regardless of marriage and tax filing status.

What is a venture capitalist?

Venture capitalists (VC) can be an individual or a group that invests money in companies with high growth potential. Unlike angel investors, VCs don’t invest their own money, but rather pool funds from limited partners (corporations, hedge funds, wealthy individuals, etc.) and distribute as needed. They rarely buy 100% of a company: Their percent ownership depends on how much they put in vs. what the company is valued at prior to their investment.

Benefits and downsides of angel investors and venture capitalists

Some of the benefits of angel investors include:

  1. Angel investors often invest via convertible notes. So, if your company goes on to be successful, their money can convert to equity.
  2. Seasoned angel investors can have ample business knowledge, which could benefit you through guidance and experience.

Something to keep in mind when working with angel investors is the fact that they require a large stake in your startup, so their involvement often means you have less equity and less control over the business. Additionally, if your start-up isn’t successful, their investment can stay as debt, and you’ll owe that amount back plus interest.

Some benefits of venture capitalists include:

  1. If you need substantial cash to get your company started, venture capitalists might be the best fit as they often make significant investments in companies.
  2. Like angel investors, venture capitalists can invest with convertible notes (so their repayment can come in the form of equity if the company is profitable) or for an equity stake directly.
  3. Venture capitalists have ample knowledge and connections such as other investors, industry leaders, and helpful third parties.

Like angel investors, venture capitalists also restrict your control over managing the business, and often require a controlling interest in your startup. (But keep in mind that owning a fraction of a highly successful company might be worth significantly more than owning 100% of a low-value company.)

What is the stage of your company?

To determine if angel inventors or venture capitalists are right for you, you should first consider the stage of your company. For angel investors, they are usually looking to invest in startups and early-stage businesses that are just beginning to engage in the areas of technical development and market research. If your startup is at this stage, angel investing might be best for you. VCs, on the other hand, may invest in both early-stage and developed companies, depending on the firm’s focus. So, if your company is more established, VC funding might be a better fit. Often, early-stage companies pursue non-dilutive capital – any capital source that does not require equity in exchange for funds – before seeking angel or VC investment. Examples of this include SBIR and STTR funding or local resources like Biolocity and the Georgia Research Alliance (GRA).

What is your investment amount?

Your investment amount, or how much money you need, can also determine your course of action. The amount that angels invest compared to venture capital firms is one of the biggest differences between them. Though the minimum angel investment can be as low as $1,000, individual angels typically invest between $25,000 and $100,000. In contrast, venture capitalists might be the right fit if you’re seeking more funding, as these firms have a lot more funds to invest from the pooled money from several investors. In 2022, the median investment in later stage VC-backed companies was $7.9 million, though plenty of VCs invest less than $1 million, depending on the stage of the start-up. The amount invested can also depend heavily on the sector. For example, biotech investments are frequently much higher, as the cost to get a new drug to market is huge.

What is the length of investment?

Additionally, the length of your investment will help determine whether an angel investment or venture capital is the best for your needs. Venture capitalists tend to be invested for a lot longer than angel investors, and angels are commonly invested for a period of two to five years before exiting the investment. However, this duration may change depending on your company and offerings. For example, software technology start-ups tend to have a quicker timeline to profitability than drug development companies.

Which is right for you?

It’s important to consider all the above factors when deciding whether you want to engage with venture capital or angel investors. Also, consider finding non-dilutive funding sources and taking to a financial advisor to help you make more informed decisions.

Deciding on angel investors vs. venture capitalists is a big decision, but understanding the ins and outs of each type of investment can help you on your way to successful entrepreneurship.

– India Stevenson