Difference Between Angel Investment and Venture Capital

Angel investments are usually the earliest investments made in start-ups by wealthy investors who potentially contribute to the new business through their advice and experience apart from their funds. Angel investors are generally former entrepreneurs who enjoy taking the risk, sometimes even before commercializing the idea of a new business.

Venture Capital investments are early investments usually made in growth companies by organizations that pool the funds from individuals, corporations, pension funds, and foundations. Apart from fund contribution, venture capitalists participate by representing part of the board of directorsThe Board Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more of the investment firm, recruiting senior management, and advising the top management in their strategic decisions. Venture capitalists take a calculated risk by thoroughly examining the company’s revenue growth potential to be invested in and have to be particular about due diligence since they have a fiduciary responsibility towards the investors they represent.

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Angel Investment vs. Venture Capital Infographics

Let’s see the top differences between angel investment vs. venture capital.

Key Differences

  • Angel investment is funded by investors who are usually high net worth individualsHigh Net Worth IndividualsA high net worth individual possesses liquid assets worth $1 million to $5 million. They are also referred to as HNWIs. In order to qualify for HNWI status, the individual’s liquid assets must be readily available in their bank or brokerage accounts. The assets must be accessible and easily converted into cash.read more (HNIs). Still, Venture Capital investments are funded by companies that pool funds from several individual and institutional investorsInstitutional InvestorsInstitutional investors are entities that pool money from a variety of investors and individuals to create a large sum that is then handed to investment managers who invest it in a variety of assets, shares, and securities. Banks, NBFCs, mutual funds, pension funds, and hedge funds are all examples.read more.Angel investors are usually former successful entrepreneurs who like taking a risk and using their experience to judge ideas even before they have been proven or commercialized. Venture Capitalists are usually professional investors who take calculated risks and are more particular about due diligence due to their fiduciary relationshipFiduciary RelationshipA fiduciary relationship is a relation between two parties wherein one party (fiduciary) has the duty to act in the best interest of the other party (beneficiary or principal). The purpose of studying fiduciary relationship is to identify the areas where it exists and gain an insight into the duties of a fiduciary.read more with pooled investors.While screening investments, Angel investors focus mostly on qualitative factors like founders’ background, the reason for business success, product-market fit, etc. Most start-ups attracting their attention do not have many stable quantitative metrics. Venture Capitalists consider more concrete metrics like revenue growth rate, average revenue per user (ARPU), customer lifetime value, etc. It is more so because of the greater responsibility of venture capitalists to justify the investment decision to their investors.Angel investorsAngel InvestorsAngel investors refer to wealthy investors who supply capital to budding businesses in return for a portion of their equity. read more like to provide mentoring guidance to the start-up owner. However, Venture capitalists hold a seat on the Board of Directors against the funding done. Hence, they are more involved in the strategic decision-making of the invested organization.

Angel Investment vs. Venture Capital Comparative Table

Conclusion

Both angel investment and venture capital are significant drivers of economic growth since they take a high level of risk to support new organizations. Established companies like Google, PayPal, etc., had started with the help of these types of investments.

So the question arises as to which investor to look for while starting a new business.

  • Angel investors can go for limited cash outlay, are easier to convince in sales pitches, and are more interested in a mentoring role, which involves less intrusion into the investing firm. Hence Angel investments are ideal for seed financing where the invested organization hardly has any proven data like revenue streamRevenue StreamRevenue streams refer to the different sources through which the company generates profit, such as selling the products, catering the services or offering a combination of goods and services to the clients.read more for convincing the investor.In contrast, while venture capitalists can invest more in the business, they demand a place on the board of directors. In case the requirement of funds is high, as, in the case of growing firms, the firm would have to endure making decisions in conformance with a venture capitalist.

This article has been a guide for Angel investment vs. Venture Capital. Here we discuss the top differences between them and infographics and a comparison table. You may also have a look at the following articles –

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