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March 29, 2010

Angel Investors vs. Venture Capitalists

What are the differences between angel investors and venture capitalists?

Among the many differences, there are four that stand out as critical for entrepreneurs.

1) Management/Advisory Participation

Almost without exception, when a venture capitalist makes an investment in a startup, it comes with strings attached: they require at least one seat on the Board of Directors, a sub-organization within a company that ensures that investors’ money is managed well. They tend to be very involved in the operations of the business. Angel investors will occasionally desire this degree of participation, but not nearly to the same degree as venture capitalists. This type of participation is usually a good thing; investors fund companies in industries where they feel they have expertise, and they use this knowledge to provide advice and assistance in growing your business.

2) Whose Money They Invest

Angel investors are generally wealthy individuals (successful professionals or fellow entrepreneurs who have sold businesses) who are seeking alternative ways to grow their money. The funds that they provide come from their own personal pockets, or from their family’s accounts. For this reason, their money is less constrained and they are able to invest when and where they see fit. Venture capitalists, on the other hand, are generally investing other peoples’ money. A pension fund or network of wealthy families might entrust their money to a venture capitalist to invest in specific ways. For this reason, venture capitalists have restrictions and requirements that they must meet: for example, certain levels of return on investment, or certain industries. They also tend to have a great deal more money available to invest.

3) Professional vs Amateur

Another key difference in these two types of investors arises from their degree of professionalism. Without exception, venture capitalists are professional investors who invest money vocationally, as their job. The process of joining a venture capital firm is extremely selective and arduous. Angel investors vary a great deal in their degree of professionalism and experience. On one end of the spectrum, they can be equally professional and experienced as venture capitalists; on the other, they may be casual investors who fund startups as a hobby.

4) Size of Investment

This is perhaps the most striking difference between angel investment and venture capital investment. Venture capitalists tend to invest significantly larger amounts of money than do angel investors. For example, a typical investment by a venture capital firm ranges from $5 to $10 million, with $2 million as a bare minimum. The reasoning behind this is that they prefer a very strong return (40%, for example) on a large investment to an outstanding return (perhaps 100%) on a small, angel-sized investment. Angel investors can fund companies in any amount, but it typically ranges from $50,000 to $1 million.

Are you looking to raise capital? For many businesses, it makes sense to target BOTH angel investors and venture capitalists (first, a round of angel financing, and then venture capital).

Click here to learn how to attract angel investors.

Click here to learn how to raise venture capital.

All the best,

Amir

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