July 11, 2012
What makes an angel investor different from a venture capitalist? There are four primary differences that are important for those starting a business or company to know.
1) Level of Involvement
Venture capitalists lend money with the expectation theyâ€™ll be involved with the company receiving it. For example, they may stipulate that they have at least one seat on the Board of Directors (the governing body of a company that oversees investorsâ€™ money). They may also be vocal in the operations of the company. Angel Investors are a bit more hands off, and tend to be less involved than venture capitalists. Typically, this involvement benefits companies, as investors gravitate toward industries they have knowledge about, and their advice and help can assist your business.
2) Source of Investment Funds
Venture capitalists are often representing several people. They may be investing funds from a pension plan or a network of wealthy individuals. Since they are representing numerous individuals, they have more regulations and expectations to meet. For example, they may require a certain return on their investment, or only work with specific industries. Of course, venture capitalists can typically invest far more money than angel investors, who are usually well-off individuals. Angel investors may have started businesses in the past or simply be successful in their chosen field. Their funds are usually their own, or they may also represent those who are close to them. With fewer people to answer to, there are fewer restrictions.
3) Hobbyist vs. Professional
Venture capitalists are professional investors. They make their living through their work investing funds with start-ups, and have earned their position through a rigorous selection process. Angel investors are sometimes professionals, but are just as likely to be investing in fledgling businesses in their spare time for enjoyment.
4) Investment Amount
The main difference between angel investors and venture capitalists is that venture capitalists can invest much larger sums than angel investors. Venture capitalists often invest $5 to $10 million, and $2 million is the lowest investment. The reason for the large amount invested is that they want a strong return (about 40%). Angel investors arenâ€™t limited in terms of how much they can invest, but it usually ranges from $50,000 to $1 million. Angel investors expect an outstanding return on their funds (up to 100%).
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