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May 21, 2010

Angel Investors vs. Venture Capitalists

Angel investors and venture capitalists are similar in that they both invest money in new and established companies at any stage prior to IPO (initial public offerings.)

The similarities end there, as you will soon see.

As a rule, angels and VCs can be distinguished from one another by their behavior in four main areas: 1) level of professionalism; 2) whether the money spent is the investor’s own money or someone else’s; 3) whether the investor expects a seat on the company’s Board of Directors; and 4) size and growth stage of investment.

1. Professionalism

Angel investors do not make a full-time job of investing money in companies. They are wealthy by means other than investing, and have other commitments. Rarely do angel investors work through a venture capital firm. Instead, they work directly with the entrepreneur. Angels are not always in the equity capital game for profit; some angels invest simply because they like the entrepreneur or believe in the cause.

Venture capitalists, on the other hand, are full-time investors. They regularly commit funds to growing companies and manage a portfolio of company investments. Their primary skill is risk management – that is, they invest in a range of companies and work to profit handsomely from the overall spread. The chief concern of a VC is return on investment (ROI).

2. Personal vs. Institutional Money

Angel investors are known to invest their own money rather than that of an institution. They are typically independently wealthy and are not under any outside pressure to invest wisely. If an angel loses money on an investment, he suffers alone.

Venture capitalists are under pressure to invest wisely, because they spend other people’s money. Venture capital firms manage a “fund” or pool of money gathered from outside sources – such as pension funds, corporations, wealthy individuals, and others. A venture capital firm’s prime directive is to make money, grow the fund, and share the wealth among the funders.

3. Control Over the Company

Angel investors generally do not request a seat on the Board of Directors of any company they invest in. They might serve on a Board of Advisors, but Advisors do not have corporate voting rights. Therefore, while angel investors do play a role in the growth and success of companies they invest in, they do not have as much control as a venture capitalist has.

Venture capitalists almost always require voting rights and a Board seat. This way, VCs retain some control over that in which they have risked their money. As mentioned above, VCs are in the business of profit, not idealism.

4. Size and Stage of Investments

Angel investors generally invest no less than $5,000 and no more than $500,000 in a company. They invest early – usually at the “pre-seed” ($5-100K) and “seed” ($100-500K) stages. At the pre-seed and seed stages, most companies are still in the research and development or early revenues phase of their business plan.

Venture capitalists invest far more equity capital. Minimum investments are typically $2 million, sometimes as high as $20 million – and sometimes more. VCs invest at the Early, Later, and Mezzanine stages. That is, they buy equity in companies that are demonstrating the ability to grow.

In some cases an angel investor can also play the role of a venture capitalist (as a fund participant) and vice-versa (outside the VC firm in which she works), but as you can see, the two terms are distinct.

Go Out There And Get Funded!

Now that we’ve explained the differences between angel funding and venture capital, the ball is in your court. You should decide which one to pursue, make a game plan, and take action.

Click here if you want to raise angel funding.

Click here if you want to raise venture capital.

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