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Difference Between Venture Capitalists and Angel Investors

  
  
  
  
  
  
  

venture capital
When an entrepreneur is ready with a business plan that he or she has researched, prepared, and is confident will be successful, the next step is to find funding.  The funding should start with the entrepreneur.  If you are not willing to put your own money and risk into your business, then why should anybody else?  Next, the funding should come from sources like family and friends (also known as FFF: family, friends and fools).  If your own family and friends aren't willing to invest in you, why should complete strangers? Finally, the next step is to find external funding from a bank, venture capitalists, or angel investors. Usually banks are unwilling to fund startup ventures that don't have 2-3 years of financial statements due to the high level of risk, and banks are especially risk adverse and not open to investing in small business during a recession. That leaves two 2nd round funding choices for entrepreneurs: venture capitalists and angel investors.  So, what's the difference?

Angel investors are wealthy individuals who help entrepreneurs during the startup phase by providing seed capital, which is the capital that is required and utilized in starting and growing a business. An angel investor is more like your friends, family or fools than a bank or venture capitalist because an angel investor is more likely to give importance to the entrepreneur than the business model. Angel investors are usually entrepreneurs themselves and they like to help upcoming entrepreneurs, not only by providing the capital but also by mentoring. 

A venture capital fund also invests in companies in the startup phase of the business, but can be defined as a pooled investment that uses the money from third-party investors, such as investment banks or wealthy individuals, to invest in business projects.  A venture capital firm is an investment company that invests its shareholders' money in startups and other risky but potentially very profitable ventures.

Difference Between Venture Capitalists & Angel Investors:
seed capital

  • In a startup business the angel investor comes into the picture earlier than the venture capitalist. Angel investors are usually the 1st or 2nd round of funding (seed or concept stage), while venture capitalists are usually the 3rd or 4th round of funding (growth stage).
  • Angel investors are individually wealthy whereas venture capital is usually pooled funds or an investment firm.  Angel investors privately invest their own funds, while venture capital is usually a professionally-managed fund.
  • The amount of capital provided varies. Angel investors provide capital starting from $25,000 to $1M (approximate amounts depending on the deal). Venture capitalists generally do not consider deals less than $1-2M. 
  • The process of obtaining funds is less rigorous in the case of angel investors, and very rigorous in the case of venture capitalists.
  • The terms and conditions put forth by venture capitalists are generally more stringent than angel investors.
  • Angel investors are sometimes said to invest "emotional money," while venture capitalists are said to invest "logical money". 
  • Angel-funded startup companies are less likely to fail than companies that rely on other forms of initial financing.

Despite their differences, many angel investors work with venture capitalists to find the best investors for great startup companies. Check out the directory on our website for links to other angel investing groups and venture capital firms.

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