What is the difference between Angel Investors and VCs?

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If you are looking to scale your business and accelerate growth, you might be seeking funding from a venture capitalist (VC) or an Angel Investor.

On the face of it, they perform very similar functions. They both invest capital into early-stage businesses (sometimes they are the very first source of external funding) and receive an equity stake in return.

However, founders should be aware of the differences between the two as it will inform your decision on whom to approach, your strategy when pitching to them, and prepare you for what they will expect from you once they’ve agreed in principle to invest.

Angel Investors

An Angel Investor is a high net worth (HNW) individual investing their own money into businesses they feel have high potential for future returns. They will sometimes contribute their advice and business experience as well. They generally invest at an earlier stage than most VCs. In fact, with the possible exception of a friends and family round, they are often the earliest investors in a business, thereby taking an extremely high risk, high reward approach to investing.

By backing a business that is likely pre-revenue and has very little demonstrable traction and/or evidence of product-market fit, there is a high chance that it will fail to capture significant market share as it faces fierce competition from both fellow start-ups and established incumbents. However, as the Angel Investor will be awarded a fairly large slice of equity (usually around 20%) when the company’s valuation is still low, it has the potential to offer a huge payout upon exit if the company grows significantly. A real-life example is Peter Thiel, Facebook’s first big investor, who turned his initial $500,000 investment into more than $1 billion when he cashed out his shares during Facebook’s IPO.

Angel Investors

Venture Capitalist (VCs)

A venture capitalist (VC) is a firm that invests in growing businesses. They generally use money pooled from investment companies, large corporations, and pension funds. Typically, VCs do not use their own money to invest in companies. As they are not investing their own money, they have to be more careful and deliberate about selecting businesses to invest in.

Usually, they are investing higher amounts of money and at a slightly later stage once a business is able to provide some financial and operational metrics which the VC can evaluate, amongst other elements. They will conduct a full due diligence check on your business – team members, financials, outstanding shares, IP checks, sales channels, supplier contracts, product, legals and potentially much more could all be subject to due diligence.

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What are the key differences between Angel Investors and VCs?

While Angels and VCs have many similarities, they also have a number of differences between them that founders should be aware of:

Stage

Angels are likely to invest at a much earlier stage – they invest at the (pre) seed-stage while VC investments generally range from Seed to Series B with the exception of a few outliers investing earlier/later. To put it simply, Angel investments are usually in the thousands while VC investments are usually in the millions.

Investment Process

Since Angels are investing smaller amounts at earlier stages, they are less likely to perform extensive due diligence and demand that the business supplies them with the same information a VC would ask for. As a reminder, VCs are investing other people’s money so they are required to be thorough and mitigate the investment risk as much as possible. They will expect detailed business information including a business plan, financial statements, financial projections, marketing plans, and market analysis. VCs will require a much larger time frame to invest. Angels, on the other hand, can be as flexible as they like which is why they are often sought out by businesses that are still at the very early stages. A business that has already developed beyond this may prefer to focus on VCs as they are able to provide more capital in addition to operational expertise and industry connections.

Post-investment

After investing, VCs might require that you establish a Board of Directors and give them a seat on it. They may request additional changes to your business structure as well while Angels are less likely to do so.

Many Angel investors also act as mentors to businesses they invest in. They might offer suggestions about running your business, help you form connections with lawyers, accountants, and banks, and help with decision-making. Meanwhile, VCs are more likely to provide networking and operational support as opposed to personal mentorship and guidance. Although this varies from firm to firm.


Who to approach and when

Whether you want VCs or Angel investors to invest in your business, you need to be prepared. You will need to perfect your investment pitch, check out Runway Pro for more insight and advice on pitching!

Before you pitch to a VC or Angel, it is critical that you do your research and find investors most suitable for your business. To save you spending hours on research, we have put together an Angel Directory and VC Directory!

For a pre-revenue business with limited traction, consider approaching Angels for investment. If you feel you need mentorship and help with your personal network, be sure to identify Angels that are able to provide this level of support for you before you approach them for investment. If you think your business has already hit these initial growth milestones and you are ready for institutional capital and more hands-off operational support then VC investment might be right for you.

In both cases, think very carefully about how much you are giving away and at what price, as well as who you are bringing on board. These decisions will have enduring consequences for your business.