All companies start out as an idea – but the path from conception of this idea to IPO and beyond is littered with the corpses of businesses past. Ultimately, the startups that succeed are those that successfully execute their strategy and vision in providing value to their customers. However, this wouldn’t be possible without the support of strategic investors that guide entrepreneurs along each step of the way. Breaking down the types of investors that invest in early stage businesses into angel investors and venture capitalists, this post will focus on what these terms mean, the differences between them and the implication for your business.
Angel Investor Profile
Angel investors are usually successful business people who use their personal wealth to support an early stage business, bringing their business expertise to steer the business in the right direction. They usually invest in the same industry they are from and they make their own decision about the investment in return for shares in the business.
They can be wealthy, well-connected individuals who are personally passionate about a product, or a group of angel investors who club together to fund startups.
Venture Capital (VC) Investor Profile
Venture capital firms are made of professional investors who provide capital to businesses with high growth potential. Their money comes from a variety of sources, including corporations, high net worth individuals and private and public pension funds. They often have a say in the future of the company and its running, often sitting on the board of directors, and they can provide their industry expertise and business connections. Their goal is usually to bring the business to its initial public offering (IPO) stage so that they can sell their shareholdings to the public at high profit. In particular, "early stage" venture investors focus on taking a company that has successfully proven its concept, and help them to accelerate their sales and marketing efforts.
Main Differences
Amount invested: as angel investors invest their own capital, the amount invested is quite flexible: it could be a small “seed” amount to get the business off the ground, or be a larger raise to allow the business to scale. By contrast, venture capital funds use other people’s money and typically have an investment mandate, with a more resource consuming deal process resulting in larger raises for it to be worthwhile.
Who they invest in: angel investors usually specialise in early stage companies which they help to grow in the hope of lucrative valuation lift ups. On the other hand, VCs typically invest in early stage start-ups only if they have shown high growth potential, if they are well known or if the founder is a well proven entrepreneur, otherwise they usually prefer in “Series A” and later capital raising rounds.
Involvement: angel investors often offer advice, experience and contacts related to a specific industry but they don’t expect a direct involvement in the running out of the business. On the other hand, venture capital investors expect a high level of involvement in the decision-making, including directorship, as they want to help the business reach its maximum potential.
Timescale: as they work alone and have a personal interest in the business, angel investors make quicker decisions. Meanwhile VCs need more time to evaluate the situation, doing a lot of research and due diligence in order to understand if the business has the potential to bring to big returns.
Length of investment: venture capital investors are usually invested for a long period, often longer than ten years; angels are usually involved for 2 to 5 years before exiting the investment.
Motivation: even if the main goal of angels is to generate a return on their investment, they certainly feel personally passionate about the business in which they invest. They often want to help less experienced business to take off in the same industry in which they are experts. VC investors are more focused on finding the right businesses, help them improving their value and make a lot of money in the process.
Choosing the type of investor to fund your start-up is not an easy decision to make. Both angels and VCs offer their unique advantages and disadvantages, which need to be considered in the context of your individual startup, and the wider industry. The important thing to remember is that these investors are not simply providing you with funds; but they are strategic assets with personal and professional networks and experience that will ensure that your business is heading in the right direction.