Venture capitalists and angel investors both play crucial roles in funding startups, but they differ significantly in their approach, resources, and investment stages. Angel investors are typically high-net-worth individuals who invest their own money, often during the early stages of a company, when it’s just starting out. Their focus is often on supporting founders they believe in, even when the risk is high.
Venture capitalists, on the other hand, manage pooled funds from multiple investors and usually come in during later stages, helping startups scale once they've proven their business model. Understanding the distinctions between these two types of investors is essential for entrepreneurs seeking funding, as each brings unique benefits and expectations to the table.
What is a Venture Capitalist?
A venture capitalist or venture capitalist firm is a financial professional that invests in small, fast-growing companies. In addition to providing companies with funds, these individuals or firms take a position on the company’s board. They use their expertise and position to influence how the company operates, with an intention to guide them toward success and growth.
Venture capitalists invest in businesses that are considered risky investments. They understand that and fully expect to take a loss on the majority of their investments. Venture capitalists invest in many businesses, expecting the few that succeed to produce large enough returns to make up for the losses caused by others.
Venture capitalists don’t often fund brand-new companies. They typically look for businesses that are already established and are generating profit but are looking to grow and scale. They then use their money and expertise to help these companies achieve their growth goals.
Sequoia Capital is one example of a famous venture capitalist firm. It focuses on tech startups, and some of its success stories include Google and Apple.
What is an Angel Investor?
Angel investors are typically individuals who use their money to invest in a startup company or entrepreneur that they believe in. Instead of looking for companies already generating profit, angel investors look for good ideas and entrepreneurs that they think have promise. They don’t loan money, but provide capital with the expectation of some sort of reward, typically equity in the business.
Angel investors come in a variety of types. They could be a savvy investor with no personal relationship to the business owner or entrepreneur in a strictly professional relationship. Angel investors could also be a family member or friend who is providing seed money. Depending on the investors and the business, angel investors could provide one-time funding or cash on an ongoing basis.
These investments are risky for the investor, which is why many angel investors are particular about the ideas and people they provide funding to. These investors typically see fairly modest returns. They are looking to advance ideas and foster innovation as much as they are looking for financial gain.
Comparing Venture Capitalists and Angel Investors
At the surface level, these two roles may appear similar. But comparing the methods, investments, and goals of venture capitalists vs. angel investors reveals how different these two players are.
Investment Criteria
The first major difference between venture capitalists and angel investors is the amount they invest and the companies they invest in. Venture capitalists focus on companies that are already established and earning a profit. Typically, these companies are still relatively young but they aren’t brand new. They take these mildly successful companies and hope to use their capital and expertise to bring them to new levels of profit and success, which will then generate strong returns for them.
To do this, VCs have to invest significant capital. They often purchase 25%-50% of ownership in the company. This provides a large amount of funding that can help the company complete ambitious projects, such as expanding or bringing a new product to market. Their ownership in the company also gives them the influence and control needed to guide the company.
Angel investors typically fund brand-new companies and startups. These businesses may not even be fully formed yet. It could just be an entrepreneur with an idea. Angel investors are looking for innovative people and good ideas and use these to determine the companies they’ll fund. The capital they provide is often used as seed money to fully launch the business.
The amount an angel investor provides varies between investors and business needs. It could be as low as $10,000-$15,000 or up to hundreds of thousands of dollars. They’re not trying to buy ownership of the company but will use their discretion and risk tolerance to determine the amount they’ll provide.
Involvement and Control
Venture capitalists invest with the expectation that they’ll have significant involvement in business development. They’ll typically serve as board members and help guide the business management and ownership team toward the successful use of the capital provided by the VC.
An angel investor’s involvement will typically depend on the investor and the business. Some angel investing may be completely hands-off and allow the business to use the capital as it sees fit. Most angel investors take a seat on the company’s board to provide guidance and mentorship. Angel investors are typically experienced investors and business professionals and could provide valuable insight.
Investment Purposes
Venture capitalists invest with the intent to take an already mildly successful business and help it grow. Therefore, businesses in a growth stage or who need help achieving their desired scale may want to reach out to venture capitalists. Businesses that work with venture capitalists can get sizable funding that can help growth, but they’ll also need to be okay with the ownership and influence the VC will have.
On the other hand, if you have an early-stage business or even just an idea that you want to turn into a business, then an angel investor may be the better option. They can provide seed capital to create your product, launch a marketing campaign, or hire staff. Depending on the investor, they may be able to provide some advice and insight on achieving success.
Investment Length
Venture capitalists invest in businesses for an average of 10 years. The investment length will typically be determined before they invest. For those 10 years, they’ll provide guidance and strategic mentorship and help develop a strong business model. At the end of the investment, their goal is to have made significant returns.
Angel investors also invest for about 10 years, but they could exit sooner or later depending on the success of the business and the investment. While invested, they’ll often provide the business owner or owners with industry insight and mentorship to help the business succeed.
Fostering Innovation
The biggest similarity between venture capitalists and angel investors is their role in helping businesses and entrepreneurs. They focus on companies in different stages, but both can help foster and advance innovation. So if you’re a business-minded person with an idea or an already successful business you’d like to see grow, seeking funding from a venture capitalist or an angel investor may help.
Frequently Asked Questions
What is better, angel investor or venture capitalist?
Are Shark Tank angel investors or venture capitalists?
What is the main difference between angel investors and VCs?
The main difference between angel investors and VCs lies in their funding approach, investment strategy, and level of involvement. While angel investors offer personalized support and early-stage funding, VCs provide larger investments and strategic guidance to scale a business to the next level.