In recent times, angel investors and venture capitalists are not restricted to investing in tried and tested business models in India anymore. Rather, they are looking to invest in disruptive and innovative business ideas and models. They are increasingly becoming comfortable with the idea of investing in startups that are in the pre-revenue stage . Let us learn more about the difference between Angel Investors and Venture Capitalists .
Venture capitalists and angel investors are two essential components of any startup funding business. When a startup business requires financial help, the angel investors invest their own money in the company. They offer money at an early formation in exchange for convertible equity or debt. On the contrary, venture capitalists also play a crucial role in providing financial support to companies.
As an entrepreneur, you will come across many new terms while deciding how to fund your business. The ‘hot’ way to raise money nowadays, particularly if your idea is new, is to raise funds from VCs or angels in exchange for equity. But how do these companies or individuals differ from each other? Let’s find out:
What Is an Angel Investor?
Angel investors are high net worth individuals keen on investing in new startup business. Typically, they will be part of the start-up ecosystem working a regular job or running a venture.
What Is a Venture Capitalist?
Venture Capitalists (VCs), on the other hand, are professionals working with a firm that deploys funds it raises from HNIs and others.
Timing of investment: Angels are typically the first investor offering seed capital to a company. They are less likely to participate in future rounds. VCs, on the other hand, are more likely to participate in companies looking for larger sums.
Due Diligence: Angels work on their own or as part of a team of angels. They don’t have professional help and may not be experienced in all aspects of business. For this reason, they may not be very thorough while making their investment. VCs, on the other hand, may spend a lot of money doing an audit of your company, given that they have to answer to partners in their firm.
Board Involvement: Angels will always have a seat on the board initially; if they have invested as a group, one of them will take this seat. However, once a VC invests, the angel may retire from the board entirely.
Expectation of Returns: Angels and VCs are both major risk takers in that the majority of the businesses they invest in are likely to fail early on. For this reason, the investments that deliver are expected to give high returns (typically 10x or more).
Startup Fundraising in India – When beginning a startup, you should know which one you should turn up when raising funds for your company. Whether you need angel investors or venture capitalists depends on the type of business you want to commence. Venture capitalists are employees that take money from people and invest them in companies.
Venture Capitalists vs. Angel Investors
So, what distinguishes angel investors from venture capitalists? If you’ve read this far, you’ve probably figured out a few things:
- Angel investors put up less money than venture capitalists.
- Venture capitalists demand more equity in a company than angel investors.
- Angel investors, as opposed to venture capitalists, fund younger, less established businesses.
- Venture capitalists seek a higher rate of return on investment than angel investors.
- Angel investors work with and mentor business owners more than venture capitalists.
There are, of course, some exceptions. There are probably venture capitalists who enjoy nothing more than mentoring business owners, and there are probably angel investors who don’t want to get too involved with the business owners in whom they invest.
But, for the most part, the distinctions listed above are correct. As a result, it’s easy to see why angel investors are dubbed ‘angels, ‘ whereas the venture capital industry is frequently derided.
However, both angel financing and venture capital can be a valuable source of funding for startups.
Conclusion
It all depends on whether you want to attract angel investors or venture capitalists. Business owners who have been there and done that tell us the process differs slightly between the two. Hope , the above article helps you understand angel investors and venture capitalists better.
FAQ
Why are angel investors preferred over VC?
Angel investors are often preferred over venture capitalists because they provide quicker access to capital without the stringent requirements and due diligence of VCs. Angels offer more personalised guidance and mentorship, making them attractive for startups seeking not just funds but also valuable expertise and networking opportunities.
Are Shark Tank angel investors or venture capitalists?
The investors on the TV show 'Shark Tank' are typically considered angel investors. While some may have elements of venture capitalists, the show's format aligns more with angel investing, where individual investors make equity deals with entrepreneurs in exchange for funding and mentorship.
What is the main difference between an angel investor and a crowdfund investor?
The primary difference between an angel investor and a crowdfunding investor lies in the scale and approach. Angel investors are typically individuals who invest their own money in startups, offering mentorship. Crowdfunding investors, on the other hand, contribute smaller amounts collectively through online platforms, with no direct mentorship involvement.
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