Venture Capital Angel Investor
The Differences Between Angel Investors & Venture Capital
The line between venture capital and angel investors is often blurry. The typical distinctions are in the size of the investment, stage of financing, structure of the fund or investor group and the background of the venture capitalist and that of the angel investor.
Size of Investment
The size of investments range by the investor, but typically an angel investor will invest a significantly smaller amount of capital in a start-up than a venture capitalist would. This is true for a few reasons: investable income, stage of the business, risk and structure of the investor and/or fund.
Many angels are high net worth individuals who had a successful career and are now retired or working less. These angel investors often have less capital that they are willing or able to put into what is often a risky investment. Venture capital firms, on the other hand, collect capital from investors and pool their money into funds so they have more capital on hand for investing in a start-up. Venture capital firms can invest anywhere from $100,000 to millions of dollars in a single start-up while angel investors on average invest around $40,000 but that number can be much higher and much lower.
Stage of the Business
The stage of the business is important, meaning that angel investors tend to invest in start-ups at the very early stages of the company. This involves a great deal of risk which limits the investors’ capital commitment. But that is typically not a big impediment to the start-up because in the first year(s) of operation, the business requires less capital from outside investors. Once the firm has developed and proven it has the management or the idea that could evolve into a much larger, more profitable business, a venture capital firm may step in. Though some venture capital firms focus on early stages of the start-up, many invest in companies with a short but proven track record of producing a consistent profit. Venture capitalists therefore focus on the later stages of a start-up and give guidance to the management team during what can be an extremely trying expansion process.
Structure of the Fund
While some angel investors work together in angel investor groups and form venture-like funds, many times angel investors invest independently in a business. This goes to the nature of angel investment, which is that angels often have a personal connection to the business or the owner(s). Angel investors often work or formerly worked in the area of business. So, a former Silicon Valley tech company owner may become an angel investor who looks for new technology firms. The angel investor will use his past experience to advise and assist the start-up so the investment is more of a close partnership than simply a monetary transaction.
Venture capital firms often have a similar background but the venture capital fund’s management team are full-time venture capitalists, not part-time investors. The venture fund’s goal is to produce successful businesses to generate returns to the fund’s limited partners. Unlike angel investors, the venture capital fund derives its income directly from management and performance fees paid by the fund’s investors. Of course, the larger performance fee is contingent on the portfolio investment’s ability to make a profit so the VC team has a big incentive to grow young companies into bigger, more efficient firms.
Background of the Investor
As I’ve just written, angel investors and venture capitalists are different in that the former often invests independently almost as a hobby or part-time interest, while venture capital firms invest through funds and sometimes alongside other venture firms in club deals. But the background of angel investors and venture capital investors have some connections. For example, many venture capitalists and angel investors come from a background working in technology. In the last 12+ years, many angel and venture investments have been in tech start-ups (although this is not the only area of investment, health care, biotechnology, financial services, etc.) so the investors reflect the companies invested in. The Center for Venture Research provides a profile of a typical angel investor that gives some insight into angel investors’ backgrounds:
The average private investor is 47 years old with an annual income of $90,000, a net worth of $750,000, is college educated, has been self employed and invests $37,000 per venture. Angels often invest close to home with seven out of ten investments made within 50 miles of the angel investor’s home or office. According to CVR “Informal investors are older, have higher incomes, and are better educated than the average citizen, yet they are not often millionaires. They are a diverse group, displaying a wide range of personal characteristics and investment behavior.”
I hope this has given a clear distinction between venture capital and angel investors.
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