June 5, 2011
Do you know the difference between a venture capitalist and angel investor? There are several differences; however, there are a few that are key for entrepreneurs.
1. Advisory or Management
It is a safe bet to expect a venture capitalist to attach strings to the investment, this is almost without exception. Be prepared for them to require a seat on your board of directors, which is the body within a business that takes care of the investors cash ensuring it is managed correctly. When it comes to business operations, they are going to be very involved. An angel investor may require some participation but rarely to the same degree. That is not to say the involvement is a bad thing, because investors tend to put money into businesses they are comfortable with and have some experience with. This knowledge can come in very handy when it comes to growing your company.
2. Where the Money Comes From
An angel investor is usually a wealthy person, fellow entrepreneurs or professionals who have made a good deal of money and they are seeking various ways to increase their reserves. This means all of the investment dollars are coming straight from their own accounts, or those of their family. Having full control over the money means they can basically invest it wherever and with whomever they see fit. This is not the case with a venture capitalist; they are investing someone else’s money. It could come from a network of wealthy individuals or a pension fund. That equals at least some restriction on the investor, there will be certain criteria an investment must meet such as ROI or a specific industry. On the up side, they are usually set with considerable amounts of money.
3. Amateur or Professional
Professionalism is another key difference between these two investor types. A venture capitalist is without a doubt a very professional individual, investing money is their career, one that was hard won to say the least. Joining a firm is difficult, time consuming and extremely selective. You could say an angel investor is the exact opposite; they will vary when it comes to investor experience and professionalism. You will see both ends of the spectrum with angel investors, professional and experienced or casual investors who see it as sort of a hobby.
4. Investment Amounts
The biggest difference between the two types of investors is the amount of money they can or will invest. Angel investors tend to make smaller investments than a venture capitalist. A venture capital firm will invest several million on one business; two million is usually the minimum. To their way of thinking smaller percentage, returns on huge investments are much better than huge returns on a small investment. While angel investors can actually invest as much as they want or can afford typically it will fall in the $50,000 to $1 million range.
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