What’s the difference between Angel Investors and Venture Capitalists? What is their return on investment? What are their expectations and where do you find them?
Difference between Angel Investors and Venture Capitalists
An angel investor is often an experienced investor or a group of investors that invest their own money. At times a relative, a friend or someone with interest in investing is also referred to as an angel investor.
Angel investors usually invest anywhere from $25K to approximately $100K if it's an individual investing alone. If it's more than one person then the amount could go up to several hundreds or thousands of dollars.
There is also another category of angel investors, often referred to as “super angels”. Super angels invest their own money anywhere up to a million dollars combined.
Venture capitalists roles are to find investments. Venture capital firms usually invest in private startup companies with a high profit potential. The venture capital investment funds come from large corporations, wealthy investors, investment corporations or subsidiaries of investment banking firms, pension funds, insurance companies and similar resources.
Return on Investment
Angel investors invest in the equity of the company, which also means that they take a proportion of the company. They usually take between 20% to 40% stake in the companies they help build and often use a company’s valuation as a measure to decide how much company ownership they should take. Lets just say for instance the company is worth one million. Angels put in $500K, now the company is considered valued at 1.5 million. This means that the angels are entitled to more than 30% of the company. If they help grow the company then it increases their return on investment. Sometimes when the company reaches high growth potential to where it requires more investments, the angels bring in venture capitalists; sell their share to the venture capital firm and exit with high profits.
When venture capitalists fund a startup or a company in its early stage, they want 20% to 30% of the company with anywhere from 10% to 100% return on investment based on the investment they make in a company.
Both angel investing and venture capital are high-risk investments. This is when they join the company’s board of directors and/or bring in their own consultants or executives to help manage and grow the company. Venture capitalists are very involved in the investments they make and they usually take a seat in the board of directors. Angel investors are less likely to become board members but they remain actively involved.
When venture capitalists exit the company they help flourish, not only is the company now in the main stream, but the entrepreneur who operated under their guidance also improves tremendously and becomes capable of operating a serious corporation on his/her own.
In case the company fails while operating under venture capital funds then the venture capital firm sells the company assets and tries to recover as much financial losses as possible.
Expectations and Assessment
Investors seek to learn about the demand or the market size the business and/or entrepreneur have created, and the potential return on investment.
They want to know if the entrepreneur has perseverance, is passionate, focused, confident, persistent, presentable, good communication skills, understands the risk, willingness to take advice, adaptability, originality in the business idea, what makes their idea or product unique and sellable, how much money the entrepreneur has put into the business, business plan, successful execution plan with product development, marketing and problem solving expertise.
Where to Find Investors
Most communities have angel investors and they often attend entrepreneurial activities such as business plan competitions or similar events.
Venture capitalists are interested in entrepreneurs with appealing business concept. However, for many small startups, angel investors should be the first option compared to venture capitalists.
Below are websites where you can find investors:
When interacting with professional investors for the first time, it's important to come across with confidence and have an elevator pitch prepared unless the investors have other specific requirements. It's important to be persistent, however, do not come across as desperate.