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August 7, 2012

How Angel Investors Differ From Venture Capitalists

Angel investors and venture capitalists are different in several ways. The four most significant differences are: the amount invested; the investor’s professionalism; the owner of the invested funds; and whether the investor becomes a member of the company’s Board of Directors.

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The amount invested: venture capitalists (VCs) typically invest larger sums (usually at least $2 million) than angel investors. They also concentrate primarily on companies that have achieved a larger number of operational milestones than the companies that angel investors typically fund. Angel investors typically invest in ventures in earlier growth stages and provide funding of less than $100,000.

The investor’s professionalism: VCs are professional investors who make their living by investing in companies. Angel investors, in contrast, are non-professional investors who often make their living in other ways. Many are successful businesspeople in their own right.

The owner of the invested funds: VCs invest capital that is actually owned by another entity. The funds could come from a corporation, a pension fund or some other source, but they are not owned by the venture capitalists themselves. As a result, VCs are motivated to fund a company by the potential return on investment (ROI). Angel investors, in contrast, invest their own funds. Because of the difference in the ownership of the invested capital, angel investments are not always made simply to achieve a high ROI. Some angels will fund a company because they like the entrepreneur and want to help.

Taking a board seat (or not): Venture capitalists almost always take at least one seat on the company’s Board of Directors. Angel investors may or may not wish to do so.

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It’s important to realize that some VCs also act as angel investors. A venture capitalist who is intrigued by a company that is too immature or does not otherwise fit well with the VC firm’s goals may choose to invest in that company using his or her personal funds.

Peter

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