When starting a business, one of the first things you need to do is find funding. But what’s the difference between a venture capitalist vs angel investor? And how do you attract their money? Let’s take a look at the key differences between these two types of investors and how to find one to help grow your startup!
What are Venture Capital Firms?
Venture capital firms (VC Firms) invest venture capital funding in early-stage companies they believe have the potential to grow quickly and become extremely profitable.
These investors often take equity stakes, meaning they will own a percentage of the company and can potentially earn significant investment sums returns if it succeeds. Venture capitalists look for a high-growth startup venture that can achieve a rapid return on their investments.
The venture capitalist firm brings in money from wealthy individuals, large financial institutions, and pension funds. These investors typically have a team of professionals who analyze potential investments and decide whether they meet the criteria to build successful companies. They then take the risk of allowing a new company to become part of the firm’s portfolio.
Let’s look at common questions about venture capital firms.
Who Are Venture Capital Investors?
A venture capital fund is an exclusive private fund that usually invests in rapidly expanding businesses, frequently with a distinct sector-related focus.
Venture capitalists design these investments to last at least a decade, with the initial years concentrated on investing in portfolio firms. Subsequently, these resources must monitor their investments and attempt to “exit,” aiming for returns for their investors (or limited partners).
Venture capitalists must meet specific criteria under the Investment Advisers Act. Meeting the particular criteria helps them to qualify for exemption from registration as a venture capital fund. Their measures include the execution of a venture capital strategy, restrictions on redemption rights, qualifying investments, and leveraging allowances.
When Does a Venture Capital Firm Invest?
Investment venture capitalists invest in companies across their growth life cycle, from Series A through a public offering. Investors are often eager to reinvest in their portfolio companies when they launch subsequent capital raising rounds.
How Do Risk Capital Companies Structure Their Investments?
Venture capitalists structure the majority of investments as equity instruments like preferred stock. This structure allows them to adhere to federal regulations. In addition, VC funds may combine with other funds during a funding round for more significant resources and opportunities.
VC investments are typically held for an extended period, generally, until an exit event (like going public or being acquired) occurs that can generate a return on investment. Achieving these profits is the goal of both the venture capital fund and its investors.
Do Venture Capitalists Lean Toward Active Involvement in the Startup?
In addition to financial investments, Venture Capital firms provide valuable guidance by occupying boardroom chairs that grant them a seat on their portfolio companies’ board of directors or advisory boards.
From strategic advice to connecting relevant investors and customers, traditional risk capital company investors supply various services for their portfolio companies. Such amenities include operational guidance, the recruitment of essential personnel, and more!
How Much Money Are We Talking About with Venture Capitalists?
In the last few years, venture capital investment has exponentially grown, reaching a staggering $330 billion in one remarkable year. (1)
A typical venture capital investment could be as much as $30 million and range from $500,000 to over $100 million.
What are Angel Investors?
Angel investors are wealthy individuals who fund companies at an early stage of development.
Unlike venture capitalists, angel investors typically don’t take an equity stake in the business but instead offer loans or grants with more flexible repayment terms. They also tend to focus on smaller companies that may not be attractive to larger venture capitalist firms.
Angel investors can be helpful third parties when it comes to providing mentorship and guidance in addition to financial backing.
Angel investors differ from venture capitalists because they offer smaller amounts of capital but don’t require as much scrutiny or paperwork from businesses seeking funding.
Unlike VCs, angels invest their own money rather than managing funds on behalf of others. As a result, angel investors tend to be more hands-on with their investments, providing advice, guidance, and financing.
Business angel investing partners often come from the same industry as the company they invest in and may have personal relationships with the founders. Let’s look at common questions about angel investment.
Who Are Angel Investors?
Angel investors are usually affluent people who invest their own capital directly into burgeoning businesses. Most are accredited investors, and many have either started or owned a business before investing.
When Do Angel Investors Invest?
Angel investors often invest in a company’s life cycle’s initial stages, from seed funding to Series A rounds. So early-stage businesses can seek an accredited investor and secure funding in the early stages of their startup.
What Type of Investment Structure Do Angel Investors Expect?
Since most angel investors are investing their own capital, many often use syndication to pool resources.
By joining forces, many angel investors can participate in significant investments with lower capital expenditures. When using their own funds, this strategy reduces the risk to their portfolio. Depending on the inclinations of the investor and business, investments can be structured as convertible debt or equity.
Operational Control of Angel Investors
Angel investors offer financial backing and bring their expertise and industry insight to a company. Often, they take on an active role in either the board of directors or advisory board. This business model gives a new business the needed financial support of angel investments along with much-needed expertise.
How Much Money Are We Talking About with Business Angels?
Angel investors tend to syndicate together and invest across multiple companies, pooling together $200,000 to $400,000 per deal. In 2020, angels invested over $25 billion in early-stage companies. (1)
How Do You Attract Funding from Venture Capitalists?
Before seeking out venture capitalists, you should have a well-developed business plan and strategy. Venture capitalists are professional investors using private equity funds.
They look to invest money into high-potential companies that have the potential to generate high returns, so they’ll need to know your goals and plans to be interested in investing. You’ll need to have done your market research, understand your cash flow needs, and have a clear idea of the investment amounts your company needs to start.
If you’ve already been in business, you must have a picture of your annual earnings and tax filing status.
Venture capital deals only happen when you understand the market potential and can prove that your company can achieve significant growth.
How Do You Attract Funding from Angel Investors?
Angel investors are usually looking for smaller investments. You may not need as developed a plan or as much data about the market when approaching them.
It’s essential, however, that you demonstrate why your business is worthy of their investment: how it can succeed, how it fits into the current market, and what kind of returns they can expect.
Choosing Venture Capitalists vs Angel Investors
Venture capitalists and angel investors are both potential sources of funding for your business venture. Depending on the size and stage of your business, one type may better suit your business venture than the other.
The type of investor you choose to fund your business venture will depend on several factors, including the
- Size of your company
- Structure of your company
- Your business knowledge and proven track record
- Amount of funding you need
- Your long-term goals
The key differences between angel investors vs venture capital investors is the amount of money you need and the type of role you want the investor to provide.
Venture investment companies may be the best option for companies looking for large amounts of money who are willing to give up equity in exchange. Venture capitalists typically require a higher return on investment (ROI) and a longer-term commitment from businesses than angel investors do.
On the other hand, if you’re looking for smaller amounts of money with more flexible repayment terms and potential additional mentorship, an angel investor might be better suited for your needs.
Ultimately, when considering a venture capitalist vs angel investor, weighing all options before deciding is essential. The choice depends on your individual needs and goals.
No matter which type of investor you choose, it’s crucial to research and ensure the fit suits both parties. Investing in a business venture requires commitment from both the investor and the entrepreneur, so ensure you understand what to expect before signing any agreements.
With the right investor on board, your business can get off to a great start!
Our Experienced Business Attorneys Can Help
Hopler, Wilms, and Hanna’s knowledgeable business attorneys can help, whether you’re in the idea stage or actively looking for funding. We work with industry leaders and large corporations across the state of North Carolina and also have close relationships with accredited investors.
We understand how crucial it is to your business to raise funds. With more capital, your venture has a shot at increasing its market presence and capturing the attention of potential clients.
Our business attorneys can provide you with the advice and guidance you need to make informed decisions when it comes to finding the right investor and negotiating a favorable deal. Reach out today and get started on your journey to success!