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Venture Capitalists vs. Angel Investors
Learn the difference between two common sources of startup capital: venture capitalists and angel investors.
Credit: Unsplash
By Clayton Spangle
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9 minute read

One of the most important aspects of launching a startup is getting the funding you need. Business runs on capital, and your startup is no exception. Two common sources for that capital are venture capitalists and angel investors.

So what’s the difference between the two, and which is better for your startup? Let’s take a look at your options.

What Is a Venture Capitalist?

Venture capitalists work for venture capital firms. These firms pool capital, then invest it into startups and small businesses. Venture capitalists tend to make risky investments with the potential for a high return.

Pros of Working with Venture Capitalists

  • Venture capitalists invest large amounts, making them a great option for startups hoping to scale quickly.
  • Because venture capital firms are open to making risky investments, you may find it easier to get funding for a young startup from a venture capitalist than you would from a traditional bank.
  • Venture capital isn’t a loan, meaning that if your startup goes under—as most do—you won’t have any obligation to pay back the investment.
  • Venture capital firms come equipped with valuable resources, knowledge, and connections that they can leverage to help fuel your growth.

Cons of Working with Venture Capitalist Firms

  • While you don’t technically have to pay back venture capitalists, they still expect a return on their investment. This means that they are looking for startup founders aiming for an exit of some kind, such as an acquisition or IPO. They are also more likely to put greater pressure on startups to deliver results.
  • Venture capitalists will want equity in your firm in return for their investment. By accepting venture capital, you will have to sacrifice some of the ownership—and control—of your company. If a venture capitalist ends up with more than 50% ownership, your startup will effectively belong to them. They will even be able to “fire” you from what was originally your own company.
  • Venture capital firms play the odds. They bet on 20 companies, expecting 19 of them to fail—and hoping that 20th investment makes up for the ones that failed. This means that an investment from a venture capitalist isn’t always that strong an endorsement of your potential.

What Are Angel Investors?

Unlike venture capitalists, who work for firms, angel investors are wealthy individuals who invest their own money into startups. Angel investors usually get involved during the earliest stages of a startup’s lifespan—often right at formation. In return, they accept convertible debt or equity in the company.

Pros of Working with Angel Investors

  • Like venture capitalists, angel investors are generally open to riskier investments than a bank would be. However, they prefer to stick with companies that they’re personally confident in—in an industry that they know—meaning that a nod from an angel investor can signal real potential for your company’s future.
  • Angel investors are typically ready to invest in startups at an earlier stage than other investors, including venture capitalists.
  • Angel investors don’t loan their investments and won’t have to be repaid if the startup fails.
  • Angel investors usually acquired their personal wealth through successful business ventures of their own, meaning that they can provide experience and connections to the startup. (However, this may not be as much of a factor as it is for venture capital firms, who often have more resources at their disposal.)

Cons of Working with Angel Investors

  • Because angel investors are using their own money, they won’t have as much capital to offer as a venture capitalist or bank would.
  • Like venture capitalists, angel investors expect an equity stake in the companies they fund. This leads to the inevitable downside of losing some amount of control over your startup. And because angel investors want a return on their investment, they may use that control to direct the business in a direction they feel is most profitable, regardless of your original vision.
  • Angel investors may invest incrementally rather than giving you the full sum all at once. This allows them to protect their investment by only committing a portion at certain milestones. Then, if your startup goes under, they only lose the investments they’ve made up until that point.

Should You Seek Funding from Venture Capitalists or Angel Investors?

There’s a lot of overlap between angel investors and venture capitalists. However, there’s enough distinction that there may be a right or wrong choice when it comes to raising capital for your startup.

When Does a Venture Capitalist Make Sense?

Venture capitalists gravitate toward industries and trends that promise the highest return. If your startup fits into that kind of industry, a venture capitalist may take an interest in you. This is especially good news for tech startups, which often have the best potential for a major return. If you need a large amount of capital to take your startup to its goals as quickly as possible, a venture capital firm may be just what you need. If you’re planning to run your own startup indefinitely, a venture capitalist may not make sense. From their perspective, the goal is going public or selling the company for a large amount—that’s how they get their return. If that isn’t your goal, you may want to consider an alternate option. Venture capitalists may want your company to have already established some significant proof for its potential. If your company is at too early a stage, you might have trouble finding interested venture capitalists. On the other hand, if you’ve made a mark already, this may be the perfect time to start courting venture capital firms.

When Does an Angel Investor Make Sense?

  • Angel investors tend to invest in industries they’re personally familiar with. If you can find angel investors who have a background in your industry, they may be the right choice.
  • Angel investors are known for getting involved during the pre-money valuation stage of a startup. If you’re just starting out, angel investors may be your best—and possibly only—bet. Angel investors can serve as a critical stepping-stone early on in a startup’s evolution. If you’re already past that point, however, venture capitalists may be more fitting.
  • Angel investors have a limited pool of personal wealth to draw from for investments. If you don’t need much of an investment—or you want a lot of smaller investments rather than a few big ones—this can work well. A venture capitalist might not consider your startup worth their time under those circumstances. On the other hand, if you need a sizable chunk of capital, an angel investor may not be able to help you much.

How to Get Funding for Your Startup

Whether you’re soliciting funding from a venture capitalist or angel investor, the process will be similar.

1. Map Out Your Business Plan

If you haven’t written out a business plan already, now is the time. Having a clear business plan will help you:

  • Estimate how much capital you need
  • Establish your priorities, prospects, and long-term strategy from the start
  • Settle on the selling points you’ll want to highlight for potential investors

2. Build a Pitch Deck

To get an investor interested in your startup, you’ll have to convince them that your startup has the potential to give them a serious return on their investment. Your pitch deck should include a concise overview of:

  • What service or product your startup is offering
  • The market pain points that your startup will solve
  • How far your company has come so far, and how far you plan to take it
  • The milestones you’ve mapped out for your startup’s journey
  • Your company’s financial standing
  • How you can generate a return for investors
  • The investment amount you’re asking for

If you’re pitching to angel investors in the early stages of your startup, you may not have any key metrics to prove your business model. (You probably won’t have any profits or sales to show off yet.)

In that case, you should emphasize your team—even if that’s just you and a co-founder. Who are the people behind this startup? What have they done, and why should an investor bet on them?

As your company grows, an org chart will help with this. Using an org chart, you can show investors who you’ve hired and how you’ve structured your team.

3. Find Your Investor(s)

Once you have your startup’s roadmap and selling points nailed down, it’s time to pitch to investors. There are a few different ways you can find investors, such as:

  • Networking
  • Asking other entrepreneurs for recommendations
  • Attending industry events
  • Searching for venture capitalist firms or angel investors online
  • Joining entrepreneurial groups on social media sites like Facebook and LinkedIn

Always do your homework before deciding to reach out to an investor. This will help you avoid wasting your time pitching to an investor who was never going to be right for your business.

Once you have a list of possible candidates, arrange some meetings to make your pitch. (You can either do this in person or through a virtual conference.)

4. Be Ready to Say “No”

Choosing to work with an investor is a major commitment. Don’t rush the decision—and don’t let the investor rush you, either. Even if an investor is interested in backing you, take the time to ensure they’re right for you before signing anything.

5. Close the Deal

When you’re confident that you’ve found the venture capitalist firm or angel investor you’re looking for, you can close the deal and take the next steps to grow your company.

Congratulations! We’re rooting for you.

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