How do Angel Investors differ from Venture Capitalists?

angel investors vs. Venture capital

In many ways Angel Investors are looking for the same things as Venture Capitalists, but there are some big differences that companies should be aware of that will play a part in shaping their financing strategy.

Here are a few obvious contrasts that you should be aware of.

Let’s start with Definitions:  An angel investor is a high net worth individual with a net worth excluding their home of $1 million or more, or who has an income of $200,000 per year (or $300,000 for a married couple) with the expectation that this income will continue into the future.  Angels differ from Friends and Family who will typically invest very early on when all you’ve got is an idea and who will invest in YOU rather than in your company.   Venture Capitalists are typically formed as Limited Partnerships in which the Limited Partners invest in the Venture Capital fund.  The fund manager is sometimes called the General Partner and the job of the General Partner is to source good deals and to invest in the ones that they think will return the most money to the Limited Partners.

Size of Investment:  Angels investing as individuals typically invest between $25,000 and $100,000 of their own money.  While there are deals that are more than $100K and less than $25K, this is the area most angels fall into.  Angel Groups work to syndicate many angels together into a single investment that may average $750,000 or more.   Angel groups are becoming more prevalent and are a great way to get investment more quickly and all at the same terms.  Venture capitalists invest an average of $7 million in a company.

Stage of Investment:  Angel investors are typically investing in deals earlier than Venture Capitalists.  They don’t like to invest in anything that’s just an idea, so the entrepreneur starts with Friends and Family to finance the early stage of the company up to where there is perhaps a prototype or Beta versions of the product.  Angel investors most commonly fund the last stage of technical development and early market entry.    Venture Capitalists will then come in with a “Series A” investment to take the company through rapid growth and rapidly develop market share.  VCs will help a company to grow until they are ready to go public or be acquired, so the dollars they invest will be increasingly larger and larger as the rounds progress.

Due Diligence:  Angels range from due diligence that might include having coffee or lunch with an entrepreneur to doing more thorough background checks and research with experts.  When angels invest in groups they tend to do more due diligence than they do as individuals.  Venture Capitalists have to do a lot more due diligence because they have a fiduciary duty to their Limited Partners.  Venture Capitalists may spend as much as $50,000 or even more to conduct thorough research on their investment prospects.

Decision Making: Angels make decisions typically on their own and are not beholden to anyone except perhaps their spouses.  VCs will have an investment committee who will work together to make decisions so that they are as objective as possible and won’t be swayed by just one member’s excitement over a deal.

Returns: Angels are investing earlier than VCs and so they have a higher risk to take into account.  Despite this, they tend to look for about the same kind of returns that VCs look for – something like 10X the investment over five years.  The reason they look for such a high return is that half of their investments are likely to go belly up and not return anything to the investor.  VCs and Angels want to see a return across their entire portfolio of investments that is 20-30% per year.

Time Frame: Most Angels and VCs look for an Exit, or Liquidity Event in which they get their money back, within three to five years.  Some investments take longer, of course, but Angels need to get their money back and VCs are even more under the gun since a typical Venture Capital Fund has a lifespan of ten years, after which the fund must return all capital and profits to the Limited Partners.

Board Involvement: When angels invest as a group, there will typically be an angel from the group who will sit on the board and represent the investors’ interests.  If the angel is a significant contributor, then they may stay on the board even after venture capitalists invest.  In other cases, the VC will take the seat representing the investors and the angel may stay on as a non-voting observer, or may retire from the board entirely.

Angel vs. Venture Capital Strategy:  Raising capital from Angels is hard work.  The capital raise always distracts entrepreneurs from doing the actual work of building product and getting in contact with customers.  Entrepreneurs should try to put off their capital raise as long as possible, so that they can build value and get a higher valuation for their company before raising capital and diluting their equity.  Sometimes angel investment is a great way to get enough traction to capture the eye of a good Venture capitalist.  Other times angels will continue investing and you might never need to go to a VC.  Your strategy for angels vs. VC investment will include factors such as 1) your ability to work for extended periods with little or no income, 2) the availability of Angel Investing Groups in your area, 3) the number and types of VCs in your area.  (e.g. do they invest in early stage companies, etc.) and finally, because money is an accelerator for business, you will need to determine the need for rapid development of product and market.  If your project is highly capital intensive and there are others who are nipping at your heels, then you probably have no choice but to raise capital as early as possible.  If your strategy involves starting with Angels and then going to VCs for Series A investment, keep in mind the following: 1) angels will usually want 20-30% of your equity for their investment so be sure to keep enough equity available for follow-on investments, 2) make sure your documentation is VC Friendly.  Use standard term sheets (check out nvca.org for a good template).  Your deal should look as much like other deals in terms of incorporation, term sheets, board structure, etc. in order to be attractive.  3) Try to eliminate or minimize participation of non-accredited investors in your deal.  Even though you can legally have a certain amount of non-accredited investors in certain types of deals, it’s best to leave them out if you’re going the VC route.

Good Luck!

 

Register for Angel Investors UnpluggedFor more information on Angel Investing (either as an Angel or an Entrepreneur) consider attending the Angel Investors Unplugged event, Tuesday January 14th 5:00-7:30PM at the CSU Denver Event Atrium 475 17th Street, Denver, CO   We will have a panel of experienced Angel Investors sharing how they think about the deals they invest in, plus we’ll have four pitches from companies looking for Angel investors through Rockies Venture Club Angel Groups.

Angel Investors or those who want to learn about Angel Investing in Denver, may consider our Angel Investing 101 Workshop Wednesday, January 15th 4:00-7:00pm

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Venture Capital For Dummies

Peter Adams is the Executive Director of Rockies Venture Club and Co-Author of Venture Capital for Dummies, John Wiley & Sons, August 2013.  Available at Amazon.com, Barnes and Noble and your local bookstore.

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14 replies
  1. Ramit Pareek
    Ramit Pareek says:

    It seems that either Angel Investor or Venture Capitalists both have the same DNA which makes them a part of the same coin rather than being different. The angel funding too comes on the second step only once you have taken first step or in other words have executed your plans well on initial stage (regardless of Industry). This is exactly the acute situation being faced by every individual like us who have a good idea but doesn’t have family and friends capable to invest in the idea. The ideas should also be given priority not just a set trend where every Angel investor or Venture capitalist runs behind just one model which is increasing. I am from India and in my country every second funding is taking place just in tech startups taking inspiration from the rising success of some of the players and other ideas are being ignored. No one is paying heed to the fact that what has been the new innovation in the idea? Be it Snapdeal or Flipkart (poster companies of Indian startups) or Paytm, they are merely the imitation of Amazon and Paypal so where’s the innovation. Hope a new breed of investors come soon to invest in innovation, ideas and people.

    Reply
    • Ian
      Ian says:

      Thanks for the insightful comment Ramit. I do agree that Angels are a part of the same coin and as such they are looking for similar returns. Some of the only companies that can grow at the rate necessary t0 return 10x over 5 years are tech companies. This is one of the reasons that we see a large amount of capital going towards these types of companies. That doesn’t mean that other types of companies can’t be successful in the VC model as well. I have seen investors get interested in companies that are in the natural food industry and have almost zero funding outside of what the founder has put in. The reason that these companies get interest is because the entrepreneurs have gone a long way to validate their product and de-risk some of the biggest things that angels stay up at night thinking about. The two biggest risks are: product risk, will this do what it is supposed to do, and market risk, will people actually buy it. If you can show investors that you are on the way to mitigating each of these problems then it doesn’t matter what industry you are in.

      Reply
    • Ian
      Ian says:

      From the little that I know about funding for films it is harder to return venture capital like returns. That does not mean that investors wouldn’t be interested you just have to have an extremely clear path towards a liquidity event, what returns you can give and when.

      Reply
  2. abdel ghani jaroudi
    abdel ghani jaroudi says:

    Hi,
    I came here for expert advice.
    I am a full time employee that had a good idea, and went out and built it for around 55K.
    I know the idea will sell, because I have done the market research necessary, but I need some money to be able to :
    1-Get the licensing to use this product in target countries.
    2-Be able to Pay myself for sustenance and PR , travel, and expenses, I need in order to get traction and introduce in a market.
    3-Patent the product.I already have a registered trademark.
    4-Customize per market needs and scale up.

    I am not residing in the states neither europe.
    What are my option of VC vs angels.
    What are the possibilities of finding angels online.
    Do you have any other advice?

    Reply
    • Ian
      Ian says:

      Hi! Thanks a lot for your comment. You have some great points.

      It sounds like you are in a similar place that we see a lot of the companies that come through Rockies Venture Club. Meaning that you have raised a family/founder round to build out a product and now you need a larger seed round to go out and validate that the market wants to buy your product. I will try and answer your questions as best I can:

      I don’t know too much about the angel and VC markets outside of the US. The best advice that I can give you is to start with some of the larger organizations that have an international presence. Some of the ones that immediately come to mind are the unreasonable institute (impact investing), and y-contaminator.\

      It is often hard to find angel investors online without first having other angels that lead your deal on platforms like Angel list.

      Sorry that I don’t have too much other advice. Rockies Venture Club is relatively sheltered in the western U.S and therefore we don’t see very much international deal flow.

      Reply
  3. JenZ
    JenZ says:

    Angel investing is a contact sport best played in teams. Angels can invest in a much broader type of companies than a VC. They can have impact, a slower growth profile, an earlier exit. VC have to pattern match for jackrabbits that can grow explosively and might “make it big”. Working with angels can be fun.

    Reply
  4. Maciej Spitza
    Maciej Spitza says:

    Good morning ,
    If I can get advise regarding Angels or any sponsor for website, are they even interesting in it or not.
    My website is already working but looks like i hit the wall thinking it will be so easy to grow.
    I guess there is too many different ideas online that people don’t want to even go FAQ page to find out how genius this is.
    Looks like more important in people lives are xxx sites or social media and they are completely drawn there and they forgot about real life.
    If they are interested in investing online what is fair share to even get their attention.
    Thanks a lot for any answers! Matt

    Reply
    • Ian
      Ian says:

      It is hard to get funding when you are developing your website. The people that we generally see coming through Rockies Venture Club have mitigated much of their technology risk and are now looking for funding to grow and validate their market. This is where the friends family and fools round comes in. A round that is around $50-200k and allows you to build our your product.

      I don’t know if you have read the book Lean Startup but it has some great tips to bootstrap your company and marketing strategy on a very small budget.

      If you do want to raise an angel round the typical round is around 20-30% and provides you with enough capital to get you to your next big milestone, whether that is being cash flow positive or ready for a series A investment.

      Reply
  5. Chancy Dzama
    Chancy Dzama says:

    What would you advise a start up like my own who are domiciled in Malawi (Africa) and have designed and developed an SMS based price information system designed to be user friendly to rural masses and have already secured a contract with a mobile network provider but lack finances for marketing materials and office materials to fully capture this volume bassed business?

    Reply
    • Ian
      Ian says:

      I don’t have too much, if any experience with companies in Africa. One place that I would suggest looking is the Unreasonable Institute. They are an international company that helps companies across the world get accelerated, and secure the funding they need to move forward.

      Reply
  6. gregory troast
    gregory troast says:

    I have a company I am purchasing in Denver that has a Net Operating Income of $ 1,500,000. Revenue has increased by 25 % the past year. Looking to potentially doubling the value of the company in the next three to five years. I am looking for investors looking for a large interest rate and possible equity in the Company. Great cash flow and upside.

    Greg Troast
    # 480-390-4162
    gregtroast@yahoo.com

    Reply
    • Ian
      Ian says:

      Hi Greg, If you are interested in pursuing angel capital I would encourage you to apply: hhttps://gust.com/organizations/rockies-venture-club/apply

      I would however caution against angel capital if you can avoid it. Angels are looking to make 60% IRR on their investments, making it the most expensive type of capital out there. Additionally when an angel invests they will want a liquidity event at some point, enabling them to get their investment back. This might not be the future that you see for your company. Let me know if you have any other questions.

      Best,
      Ian McConville

      Reply

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