Difference Between Angel Investors and Venture Capitalists

Key Difference – Angel Investors vs Venture Capitalists
 

Angel investors and Venture capitalists (VC) are two types of investors who specialize in investing in small scale startup businesses and entrepreneurs. Acquiring funds for expansion purposes is often a limitation for such startup businesses since they do not have access to equity markets or the ability to earn significant profits in the short term. Both angel investors and venture capitalists are interested in investing in sound business proposals that have the ability to be transformed into profitable ventures over a period of time. The key difference between business angel investors and venture capitalists is that angel investors contribute to the startup businesses with their personal wealth whereas venture capitalists invest the funds accumulated through a pool of investors. 

Who are Angel Investors?

Angel investors are investors that invest in entrepreneurs and small scale startup businesses. They are also known as private investors or informal investors. These investors generally have a high-net-worth. They also have the business expertise that can help entrepreneurs and startup businesses with their decision making. The main aim of angel investors is to gain financial returns from investing in the new businesses with high potential for growth.

Angel investors are usually successful entrepreneurs or former employees who have held senior management positions in reputable organizations. Different angel investors may show interests in different types of businesses. For example, a former senior personnel in an IT based organization may like to act as an angel investor to an IT startup business. Selecting a business that is familiar to him also allows the angel investor to lend his operational or technical expertise in addition to financial backing.

The investments made by angel investors can be described as high-risk investments since the success or failure of startup businesses is unknown. If the new business fails to achieve the intended results, the investors will lose their invested funds. Thus, they demand higher returns; a return of 20%-30% may be generally expected by an angel on average. Angel investors may sometimes also acquire an equity stake in the company.

Who are Venture Capitalists?

Venture capital is a form of private equity and venture capitalists are companies that have a pool of private investors that fund small startup businesses. Venture capital is also called ‘risk capital’ due to its inherent risk. They are interested in recovering their finance with a maximum return and take active participation in business’s decision making.

Venture capital funding may be difficult to be acquired by a business unless they have an attractive business proposal and clear goals for the future since venture capitalists generally have a number of similar small firms that they can invest. Furthermore, the returns required by venture capitalists are high and the minimum rate of return expected is around 20% of earnings per year. Once the business is adequately established the venture capital firm will exert an exit strategy to withdraw itself from the business. There are 4 commonly exercised exit routes for venture capitalists as per below.

From the above options, most commonly exercised are the Initial Public Offering and the Mergers and Acquisition. When the business is listed on a stock exchange, the investors can decide when and for what price the shares will be traded; this is an opportunity to gain access to a large pool of potential investors. Furthermore, if the business has flourished and established itself successfully at the time of the execution of exit routes, potential investors may see the business as an attractive investment opportunity. As a result, an improved share price can be expected. In addition, if the business is performing well, there may be other interested companies that are willing to acquire the business. Share repurchase and sale to another strategic investor are less exercised options as an exit strategy by venture capitalists. The usual time period before venture capital firms considers an exit strategy may range from 3 to 7 years and can even be more in different situations.

 What is the difference between Angel Investors and Venture Capitalists?

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