Many people often confuse or interchange angel investors, venture capitalists, and private equity deals, which are among the major sources of start-up income. While there can be a few similarities in the right light, when you compare them side-by-side, they’re apples and oranges. People often believe that business angels, venture capital and private equity are all one and the same.
A major similarity is that both angel investors and venture capitalists are making their investments into private companies for the return of private equity in those companies. Private equity is simply shares or stakes (sometimes securities) in any company which isn’t registered with the stock market.
But that’s about where the similarities end.
“If we compare VC to Angel funding, we notice that purely in terms of dollars invested, VCs easily beat out Angel investors by as much as 70 to 1 — for a common comparative investment of $7 million VC vs. $25,000 Angel. In fact, even Angel Groups typically raise only a fraction of what VC funders do.”, says Jenny Ta, founder and CEO of Sqeeqee.com, a platform promising to transform social media into a money making machine for its user base. So before reaching out to angel investors or venture capital firms, assess your current status and needs, and tailor your pitch.
Angel investors are generally lone individuals investing personal funds into a business opportunity they think will turn a great profit. And they’re not wrong! Returns on successful angel investments can be dramatic and deep, far larger than many traditional investments, which is what inspires angel investors to take the risk at all. That said, because these are personal funds, angel investors often don’t have as much to offer as venture capital firms.
Angel investors are likely to be willing to invest in businesses at any stage, from start-ups to established companies. Investment amounts are generally less than a million, though groups of angel investors might contribute in the hundreds of thousands. Far more commonly, they offer tens of thousands. They may be interested in offering up significant industry contacts or assistants, and are generally flexible enough to be either more hands-on or hands-off in their approach to the relationship.
Venture capitalists and firms are businesses which draw from a corporate fund, rather than private moneys, and can therefore often offer substantially more than angel investors. Venture capitalists rarely invest in early stage companies unless there are very compelling reasons for the exception. Most VC investment amounts exceed 1 million dollars, and they will generally require some manner of seat on the board of the company they are investing in, and will likely be hands-on in their management of their investment. But being hands-on also means a great deal of guidance, and many VC firms offer CEO coaching, marketing assistance, and other substantial perks in addition to the cash inflow. Expertise, mentoring, and services are all among the major benefits in the court of VC firms.
And, most of all, catching the interest of a notable VC firm lends a company an air of cachet which can attract media (and therefore consumer) attention which can, in and of itself, provide a significant push in popularity. But as angel investors gain ground, this may soon be true of them as well: the Forbes Midas List now includes individuals as well as firms.
Generally speaking, if a business is at the start up phase, or is very young and without many tangible measures of success, they are more likely to seek out (and receive funding from) angel investors. Venture capitalists and firms generally enter the picture after there’s enough financial evidence to support the suggestion of a sound investment, and generally provide revenue to rapidly expand a proven business concept.