Startup founders need to raise capital in order to get their businesses off the ground and attack market opportunities. The two most popular sources of capital for startups are angel investors and venture capitalists (VC capitalists).
There are pros and cons of getting angel investor vs VC funding. Understanding the difference between the two is important in terms of meeting your specific needs, and how you approach a prospective investor.
What Is An Angel Investor?
Angel investors provide capital for businesses or startups in exchange for equity or convertible debt.
They invest in businesses that are at a stage when the risks are especially high and other investors are not prepared to step in. As a result, they demand a very high return on investment.
They typically invest through equity crowdfunding platforms, angel groups, or angel networks. This is because angel investors usually invest their own funds, unlike VC investors who invest other people’s money through funds.
3 Angel Investor Examples
In the United States, angel investors must be accredited with the Securities and Exchange Commission (SEC). They invest nearly 70,000 startups across the country every year.
There are many examples of successful angel investors, ranging from ordinary investors putting down small sums, to angel investors with national profiles.
Roger Ehrenberg
Ehrenberg has a low profile, but his 63.5% exit rate makes him an all-time great.
Through IA Capital Partners, he invests in technology, real estate, and crypto-assets.
In 2012, he led the seed round for TransferWise, the British money transfer platform now known as Wise.
Jeff Clavier
Jeff Clavier has invested in over 20 startups, with an average investment of $6 million. In the last decade, through SoftTech VC, he has invested in more than 150 companies.
His focus is on e-commerce, mobile, and infrastructure monetization.
David Lee
David Lee’s biggest personal investment is $250,000, but through his company, SV Angel, LLC, he has invested much more than that.
He is one of the best angel investors for early-stage businesses and likes e-commerce, big data, analytics, and the consumer market.
What Is A Venture Capitalist?
A venture capitalist invests in startups, early-stage and emerging companies with high-growth potential or demonstrable high growth.
They invest their capital in exchange for equity. They invest through a “series” of rounds, from Series A upwards until they exit.
Like angel investors, a VC investor accepts high risk in exchange for high returns. Like angel investors, their portfolios have high rates of failure. They bet that the success of a few firms will lift the returns of the whole portfolio.
3 Venture Capitalist Examples
Venture capitalists dominate the firms that get to IPO. They handle vast sums and invest in a number of sectors. They are particularly associated with biotech, fintech, cloud computing, telehealth, and other high-growth opportunities.
Marc Andreessen
Andreessen is one of the most famous VC investors of all time. He is a super VC investor and co-founder of the firm, Andreessen Horowitz (A16Z).
Between 2005 and 2009, he and his business partner, Ben Horowitz, separately invested $80 million across 45 startups, including Twitter and Qik. Today, the multi-billion dollar A16Z has a portfolio that includes Facebook, Twitter, and a sizable crypto position.
Neil Shen
Neil Shen is the founding managing partner of Sequoia Capital China. He started his career in banking, working for Deutsche Bank, Lehman Brothers, Citibank, and others.
In 2019, he co-founded the travel company Ctrip.com and served as CFO. Shen is also the co-founder of Home Inns, a hotel network. He co-founded Sequoia Capital China in 2005.
Andrew Braccia
Andrew Braccia is a partner at Accel, having joined in 2007. His specialty is with consumer-oriented mobile and web services firms.
Before joining Accel, he worked at Yahoo. He is an early investor in Slack, Squarespace, Vox Media, Cornershop, Cloudera, Hotel Tonight, and other startups.
Key Differences Between An Angel Investor vs VC
There are a number of differences between angel investors and venture capitalists that are important for you to know.
- There is no set amount that makes a person an angel investor. However, we can say that venture capitalists do not invest anything under $1-$2 million. Angel investors typically invest lower individual amounts that venture capitalists, although the total amount invested by angel investors is roughly equal to that invested by venture capitalists.
- Angel investors accept a much higher risk than venture capitalists and consequently, demand a higher return.
- Venture capitalists typically operate through professionally managed funds that invest in external investor funds as well as their own. Angel investors invest their own money, although, as we highlighted above, they can organize themselves into groups and even take a corporate form.
- Angel investors usually invest in very early-stage firms, whereas venture capitalists invest later on in the startup’s life cycle.
- Angel investors invest in much more companies than venture capitalists. On aggregate, they invest in 60 times more businesses than venture capitalists, reflecting their need to diversify their risk.
Summary
In the debate between using angel investors vs VC funding, there are important differences that help business owners determine what investment track best suits their needs.
For smaller, earlier-stage firms, angel investors make the most sense. Those with larger, later-stage business should start their search for capital with venture capitalists.
