7 June 2023 | Fundraising

Angel Investors vs. Venture Capitalists: What’s The Difference?

Raising capital as a startup can be terrifying, especially for first-time founders with no real experience pitching to firms or networking with angel investors.

But this does not mean it’s impossible to get your startup funded. It has never been easier to raise money because of the mass amount of resources at your disposal.

This guide will help you understand the difference between angel investors vs. venture capital, how they work, and decide what the best method to raise money for your startup is.

Angel Investors vs. Venture Capitalists

Angels and venture capitalists are two types of investors who give funding to startups in exchange for equity.

Their goal is to identify companies with promising futures and provide cash injections in exchange for shares in that business.

In both cases, whether working with an angel investor or a VC, the partnership is a mutually beneficial one: you get cash to grow your startup, and they get the upside of future share value.

From there, differences arise.

The primary difference between angel investors and venture capitalists is that angel investors are wealthy individuals, whereas VCs are professional companies that exist specifically to invest in up-and-coming companies.

Other than that one crucial difference, angel investors and venture capitalists typically differ in terms of:

Let’s look at each in more detail.

Angel Investors

Angel investors are wealthy individuals that use their own net worth to make an investment in startups that show potential.

How Does an Angel Investment Work?

An angel investment is essentially a purchase of a percentage of your company.

These high-net-worth individuals make an investment into a small business or startup in exchange for equity. The cash injection is typically used as a way to fuel growth as either a one-time investment or ongoing support.

Your investor gives you a cash injection (say, $500,000), and in return, they receive a percentage of equity in your company (say, 5%).

They may also negotiate voting privileges, board seats, or other forms of control or downside protection.

While their shares in your company may not be worth a ton now, their investment horizon is long, meaning they expect to make their money back (with a significant return) over the long term.

Who Are Angel Investors

Angel investors are wealthy individuals, often ex-founders themselves who have sold or gone through an IPO, and as such have a lot of cash to invest.

Angel investors can either be accredited investors with a history in the industry or unaccredited individuals. All that matters is the amount of cash on hand ready to deploy into an investment.

It’s not uncommon to hear of a startup raising angel investor money from friends and family to get started by building product MVPs. However, this can often be broken into a separate funding round too.

How Much Do Angels Invest?

The investment amounts can also widely vary based on the specific business, and equity available. Checks can be written for as low as hundreds of dollars up to $1,000,000+. It is not uncommon to see multiple angel investors join together in a syndicate to invest closer to the $1,000,000 sum into a startup.

Both syndicates and crowdfunding have continued to grow in popularity too. For example, Gumroad recently raised both an Angel Round and a Crowdfunding Round together to spur future growth with an injection of critical cash.

Gumroad allowed prominent angel investors, Naval Ravikant and Jason Fried, to both join forces and lead the angel round. In exchange, shares are issued to all investors based on a $100 million valuation.

Gumroad is not the first and certainly will not be the last startup to tap into syndicate angels and crowdfunding to lead successful angel seed rounds.

What Funding Rounds Do Angels Invest In?

Angel investors typically enter into the picture after the company has locked in an initial investment but needs more capital to begin growing the business. However, this is not always the case, and it can vary.

Generally speaking, angels are more risk-seeking than VCs, meaning they more often focus on seed and pre-seed rounds because they can have a more direct path to seeing a return based on future possibilities of Series A funding, an IPO, or an acquisition.

If you are early on in the startup journey, angel investors might be interested in working with you. But if you are an established startup looking for a new cash injection, the angel investing route is probably not the right one for you.

How Much Equity Do Angels Ask For?

The amount of equity an angel asks for can range between 5% to 30% but could be smaller or larger depending on the specific scenario.

As angels are getting involved at an earlier stage (where there is more risk present and little to no proven track record), they tend to demand a higher equity percentage per dollar invested than do their VC counterparts.

How Much Control Do Angels Have?

Angel investors don’t typically seek operational voting power within your startup. Generally, they act as an advisor only when requested and simply inject cash into your business with no power over your startup.

Depending on their experience, however, and how relevant this is to your business and industry, some angels may prefer to be a bit more hands-on. It’s best to discuss these boundaries when laying out the terms of your relationship.

Venture Capitalists

Venture capital is an important part of the business world. It is a private equity source of funding for startups and other small businesses to give them a boost in their development and spark the commercialization of a product.

They provide capital to firms looking for high-growth investment opportunities. The key difference between a VC and an angel investor is that a VC operates as a team of individuals with pooled money from private investors, whereas an angel is a single investor.

Venture capitalists use a structure where firms are formed with limited partnerships between people with expertise and money to make more in-depth investment decisions.

How Does a Venture Capitalist Investment Work?

A VC investment works very similarly to an angel investment.

Your venture capitalist assesses your company’s growth trajectory, strategic plan, and upside potential, and offers to make a cash investment in exchange for equity.

Most VCs also require some degree of control over the company, typically with board seats and preferred shares.

Who Are Venture Capitalists?

A venture capital firm can be any firm or institution with sufficient cash, industry knowledge, or both, that invests in new ventures and startups with the expectation of high growth and a future potential exit by acquisition or IPO.

A majority of venture capital investments come from larger, professionally managed firms, but it is possible to also be an individual venture capitalist using your own net worth.

Then you have micro VCs.

What Is a Micro VC?

Micro VCs follow a similar structure as a traditional VC in the way the firm is designed. However, the primary differences are:

  1. The size of investments they make
  2. The stage at which they get involved with a startup.

Micro VC firms look for startups during seed stages to keep a lower cost basis for more equity. By doing so, they can target startups that do not have enough capital to last until a Series A funding round.

While getting involved early carries more risk, the smaller investment size for larger equity shares makes it worthwhile for these firms. It lowers the number of successful startups they need to invest in to see profitable returns.

Basically, they sit somewhere in between the angel and VC categories and can be thought of as a higher-risk, higher-reward, smaller-investment version of the typical venture capitalist.

They also tend to be more niche-focused. For example, LuneX Ventures focuses on investing in high-growth blockchain startups and cryptocurrency assets.

However, this is not necessary. Both SV Angel and Lowercase Capital are two of the larger Micro VC firms, and they get involved in a much wider range of business types.

For example, a prominent startup that raised a very large seed round with the help of Micro VCs was Uber. At the time, they went by the name UberCab and the app still had not even launched yet. It was simply an idea to order cheaper drivers right from your phone.

How Much Do VCs Invest?

While VCs can be classified as institutional investors who write checks over $1 million, the actual amount is going to vary based on the investment stage.

For instance, the average seed round gets about $4.6M from VCs these days, Series A hits close to $20M, and a Series B round can be as much as $100M, as was the case for ClickUp in 2020.

What Funding Rounds Do VCs Invest In?

VCs also target startups at different stages compared to angel investors.

Rather than finding companies in a seed round who are just getting started, VCs find established startups that need money to commercialize their idea to scale.

They minimize risk by investing in more established startups looking to raise at Series A and beyond.

How Much Equity Do VCs Ask For?

The equity size per investment can vary greatly from anywhere between 10% to 80%. Each investment opportunity is unique, and will depend on the funding, company growth trajectory, upside potential, cap table, leadership, and so on.

How Much Control Do VCs Have?

Again, this one varies.

Most VCs want at least some form of control alongside their equity, which typically looks like board seats with voting privileges.

The reason that many startups fear getting involved with venture capital firms is the power they lose due to a larger share of equity along with granting operational voting power to a third-party firm that could take away their ability to make decisions.

However, as a startup grows, it becomes vital to get venture capital funding to scale even further and faster.

Venture capitalists are keenly aware of this and use it in their favor during negotiations.

That doesn’t mean you should shy away from VC investment, however. A strong relationship with a wise and experienced venture capitalist can be a huge catalyst for growth.

Angels vs. VCs vs. Micro VCs: Who Should You Pitch To?

Let’s quickly recap on the key differences between these three kinds of investors.

Angel Investor Venture Capitalist Micro Venture Capitalist
Status Individual Institutional Institutional
Average Investment Size Less than $1m Over $1m $25K to $500K
Funding Round Pre-Seed & Seed Series A + Seed Stages
Equity Size 5% – 30% 10% – 80% 10% – 30%
Voting Interest Minimal Voting / Advisory Only Operational Voting Power Minimal Operational Voting Power

Before you are ready to pitch any investors, you should have everything about your startup perfectly aligned. For example, what is your revenue model? Are you profitable? How much capital do you need?

All of these questions and many more should be answered in-depth before you even think about seeking outside capital.

Chances are, if you are reading this, you are in a seed round looking for your first or second fundraising rounds. This means you should be considering angel investors or Micro VCs as your best partners to make this dream a reality.

However, if you are the founder of a larger startup looking to launch a Series A round then you are ready to start talking to venture capital firms.

Only you will know where your startup stands. This guide is designed to lead you in the right direction and allow you to make an educated decision based on the options available to you.

Ready To Raise Capital?

If you think you’re ready to raise capital, it’s time to start putting together all of your company information. Meeting with angels and VCs requires plenty of financial data about your startup, along with the company vision to sell why you will be successful.

Finmark can help you prepare your financials for investors, make projections, and put together information for all of your fundraising meetings and pitches. Sign up for a free 30-day trial today!

Josh Krissansen
Josh Krissansen
Contributor

This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.

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Historically financial modeling has been hard, complicated, and inaccurate. But financials are the lifeblood of any company. They’re too important to be ignored or outsourced. They should be a core part of every founder’s job. This doesn’t have to be scary. And you don’t have to do it alone. The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward.

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