In our previous article, we have discussed venture capital and angel investors. In this article, the differences between these two types of equity funding will be examined. Although venture capitalists and angels are alike in some aspects, there are paths in which you can spot the differences between them.
Five Differences between Venture Capital and Angel Investors
This is one major way to differentiate between angels and venture capitalists. While angel investors can be a one-man business or a group of angels collaborating to find a business, venture capital is usually a limited partnership business style.
There is usually a general partner who bears all the risks and several liked partners whose risks are limited to the amount contributed.
A way to look at the angel is when a wealthy uncle or friend decides to invest in your small business by the funds in the form of equity capital. Most angel investors are wealthy individuals who see the need to invest in innovative startup businesses.
Nature of business invested in:
Angels can invest in early-stage startup businesses. But venture capitalists can only invest in a well established private equity firm.
Angels can easily go for early-stage business since it is one-man stuff. He bears all the risk alone. So, without any complex financial model, angel investors can go for the bait.
It will be highly risky for venture capital firms to invest in an early-stage startup. If such a business fails, it may be almost impossible to get a refund of capital. Also, the funds of venture capitalists are from external sources.
Therefore, such funds most are adequately managed to avoid stories that touch the heart. To achieve this, venture capital enterprises only invest in well-established startups so that they can easily find a means of existence from the firm in the foreseeable future.
Level of investments:
The amount of money a venture capital firm will invest in a startup is generally more when compared with that of angels, unless if a group of angels invests in that startup.
For example, an angel investor might invest 100 dollars or 1000 dollars in a startup. But, venture capitalists can invest millions of dollars in a single startup.
Angels usually perform the role of a mentor to the startup in which it has invested its money. He or she may also provide connections to the invested company. However, it may not take part in the management of the business.
For venture capitalists, aside from providing mentorship, training, and connection, it also takes part in the management of the business. The venture capital firm will have one of its employees or partners to be a member of the board of directors of the invested company.
The financial model used by angel investors is usually less complex when compared with that of venture capital firms. Since the amount invested is small, a huge financial model is not required for Angels.
A simple cash flow analysis, the Net present value of the fund, and other less complex financial models can be used by angel investors. Also, less complex due diligence may be required by angels.
For venture capital firms, complex valuation techniques and statistical tools like Monte Carlo simulation are used to analyze the company before deciding on investing in such a firm.
In the next article, we will examine what venture capitalists do?