Getting funding for your business is no walk-in-the-park, especially if you’re just starting up. But in order to keep your business dream alive, you need capital. Depending on the nature of a business, its demand, and mainly on what stage your business is in, you might seek funding from a venture capitalist (VC) or angel investor.
You may be wondering, “Which is the best option?” It’s important to understand that there’s no right answer for everyone. You need to think about the ups and downs of each prior to settling on a choice for your business.
First, let’s get down to the basic
Table of Contents
Who is an Angel Investor ?
An angel investor (also known as a private investor, seed investor, or angel funder) is a high-net-worth individual who provides financial backing for early-stage startups or entrepreneurs, typically in exchange for ownership equity in the company or convertible debt. Often, angel investors are found among an entrepreneur’s family and friends.
Who is a venture capitalist?
A venture capitalist an individual or group that invests money into high-risk startups. Typically, the potential for the startup to grow rapidly offsets the potential risk for failure, thus incentivizing venture capitalists to invest. After a set period, the venture capitalist may fully buy the company or, in the event of an initial public offering (IPO), a large number of its shares.
It is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise.
Let’s now understand
THE DIFFERENCE BETWEEN VENTURE CAPITALIST VS. ANGEL INVESTOR
- Money used- One difference between venture capitalists and angel investors is what money they use to invest.
A venture capitalist is a person or firm that invests in small companies, generally using money pooled from investment companies, large corporations, and pension funds. Typically, VCs do not use their own money to invest in companies.
2. Time of investment- Angel investors and venture capitalists invest in businesses at different stages. The investor you appeal to depends on whether you are established or if you are just starting up.
Venture capitalists tend to invest in businesses that are now settled to lessen their danger of losing ventures.
Angel investors are more likely to invest in businesses that are just starting out. They pick organizations that they are keen on and can see turning out to be productive, regardless of whether the organization has not substantiated itself yet. Because of this, angel investors take more risks than venture capitalists.
In the event that you are simply beginning, an angel investor might furnish you with enough cash to make headway. At the point when you’re set up and hoping to extend, you may take a stab at pitching to a venture capitalist.
3. Who they invest in – Angel investors specialize in early-stage businesses, while capitalists are generally more unwilling to invest in startups unless they show really compelling promise and growth potential. While incredibly exciting startups in key industries might be able to win VC funding with a little track record, most businesses will have to demonstrate that they can walk the walk, not just talk the talk. The venture capitalist then offers funding to allow for rapid development and growth.
4. Role in your business and involvement- Both groups receive shares of the company when investing. However, venture capitalists often require a seat on the board, where business angels will function more as a mentor, to coach and advice the entrepreneurs running the business. In general, venture capitalists will exercise more control over your business than angel investors. Angels investors offer mainly financial assistance, whereas a venture capitalist seeks a strong, competitive product or service, a talented management team, and a wide-ranging market potential.
Angel investors might have valuable advice for you, but ultimately they can be as hands-on or hands-off as you want. They will have value in your business however won’t sit down on your board – dissimilar to with VC venture.
Consenting to VC speculation implies focusing on bringing more individuals into how your business, individuals who have a say in how it’s run and whose work it is to help your business arrive at its latent capacity. While this can be an enormous positive, in the case that you’re at a beginning phase it very well may be needless excess, and you probably won’t have the adaptability to turn or change center – such a large number of cooks can spoil the broth, in a manner of speaking.
5. Risk taker- Angel investors assume greater risk compared to venture capitalists. Angel investors aren’t beholden to banks or institutions, so they can invest their money as they and only they see fit. That means the investment risks that traditional funders avoid may not be of concern for angel investors. Venture capitalists present a low risk to entrepreneurs. As with angel investors, venture capitalists often do not require repayment if the venture fails.
6. Due Diligence- Due diligence is an audit of a potential investment that has incited a great deal of discussion for angel investors throughout the years. A few angel investors do no due diligence, and they are not undoubtedly, given that all the cash is their own whereas, Venture capitalists need to accomplish increasingly due diligence, given that they have a guardian duty to their restricted partners.
7. Obligations And Inspirations- They have distinctive obligations and inspirations. Angel investors are principally there to offer budgetary help. Though they may give guidance in the event that you request, or acquaint you with significant contacts, they are not indebted to do as such. Their involvement relies upon the desires of the organization and the angel investors’ own tendencies. A venture capitalist watches for a solid product or service that holds a high benefit, a skilled management team, and a broad perspective market.
When venture capitalists are persuaded and have contributed, it is then their job to help fabricate fruitful organizations, which is the place they include true worth. Among different zones, a venture capitalist will help with regards to building up an organization’s focal point and enlisting senior management. They will be close by to exhort and go about as experienced board for CEOs. This is all with the point of helping an organization profit and turns out to be increasingly fruitful.
8. An angel investor works alone, while venture capitalists are part of a company.
Angels are rich, often influential individuals who choose to invest in high-potential companies in exchange for an equity stake. Given that they are investing their own money and there is always an inherent risk, it’s highly unlikely that an angel will invest in a business owner who isn’t willing to give away a part of their company.
Venture capital’s capital will come from individuals, corporations, pension funds, and foundations. These investors are known as limited partners. General partners, on the other hand, are those who work closely with founders or entrepreneurs; they are responsible for managing the fund and ensuring the company is developing in a healthy way.
These are the most utmost differences between venture and angel investors, and the choice of which to pick is exceptionally in an entrepreneur’s hand.
Pitching to an angel investor
An angel investor may be more interested in your startup’s ideas or team than its immediate potential for profit. Pitch an angel investor on what makes your team a winning gamble yet in addition present key business factors, for example, your market size, product or service offerings, or administration contributions, competitors, and their imperfections and, if applicable, your current sales.
HOW TO PITCH TO A VENTURE CAPITALIST
When pitching a venture capitalist, present the solution your company provides to common problems consumers or buyers have and how many customers need that problem solved. Set up a strategy and pitch deck for your meeting.
During your pitch meeting, you’ll present a four-year projection of your company’s income and expenses. Your goal is to show the venture capitalist that their long-term return on investment mitigates their short-term risk.
Both Angel Investor and Venture Capital are equally necessary in case of new business opportunities due to the lack of funding done by a Bank or other financial institutions. In most cases, the banks or financial institutions do not pay any heed in the case of new generation business. Thus, the evolution of new generation businesses is possible by means of Angel Investors or Venture Capitalists.