The road to realizing your startup ambitions can be a bumpy ride. Ideas can be fleshed into reality only with seed funding; but where can you find the working capital to give your ideas a fresh lease of life? This blog outlines the journey of entrepreneurs in the startup landscape and introduces them to the definition of Angel Investors & Venture Capitalists and presents a comparative analysis between the two. After reading the blog through its entirety, aspiring entrepreneurs and budding startup aspirants can conclude who might be a better choice for their ideas – Venture Capitalists or Angel Investors.

Here are the topics covered in this article:

• Brief Introduction
• Who are Angel Investors?
• Definition of a Venture Capitalist?
• Comparative Analysis between VC & AI
• How do they work?
• When do they Invest?
• Investment Amounts
• Returns Expected
• An Investor’s Role in the Business
• Who do you pitch your idea to?

Introduction:

With the startup wave sweeping across the globe, one thing that is on every young mind is how to find investment or funding for their ingenious idea and start a business of their own. Fair enough, as entrepreneurship is the most celebrated trait in young adults and is a sign of independent thinking and leadership!

However, one of the biggest hurdles that all aspiring entrepreneurs and budding business owners face is how to approach funding. Who should they pitch their idea to? Should they go to a Venture Capital firm or is it better to be backed by Angel Investors? How do they approach the business proposal, in the format that should be presented?

These are some of the thoughts racing through the minds of our future entrepreneurs as they contemplate the idea of creating a business out of their brainchild. However, lack of accurate information often leads to chaos and confusion, leading to failure. So, we decided to do an informative piece, shedding light on the whole entrepreneurial landscape, defining VC firms and Angel Investors, and the entire process of giving shape to your dreams to become reality.

Who are Angel Investors?

Angel Investors are also popularly referred to as – Business Angels, Seed Investors, or Informal Investors. They could be an individual, a group, or a firm with high net worth who invest in an idea, a concept, or a product at a very early stage of the business. That is – when it is still dabbling in product development or company organization to make it market-ready.

Angel Investors have access to surplus funds, which they seek to find avenues or prospects to invest for large-sized returns.  And to that end, after thorough scrutiny and investigation on the feasibility of the idea or the concept, they invest money into startups in exchange for a minority stake in the organization in the hopes for a profitable return.

The seed funding can be in the form of a capital influx at the very start to facilitate the startup to establish itself in the market successfully or it can be in the form of a series of cash influxes timed at various stages to help the startup overcome the initial hurdles swiftly. The seed funding is manifested into the startup in either of or a combination of three ways –

• a business loan,
• convertible preferred stock,
• and common stock

The terms and conditions of this collaboration is drawn up supporting the angel investors as they have committed their investment based on the startup owner commencing their new venture.

Depending on the clauses inserted, some business angels might choose to be a part of the business process and may take an active interest in its development and progress. While at other times, the angel investor may choose to stay out of the business process and simply wait for hopeful longer-term returns. A lot of angel investment is often in the form of crowdfunding too, so in such cases, the investors might choose to be dormant or completely passive partners.

Who are Venture Capitalists?

Venture Capitalist could be a single individual or a VC firm that actively scouts for fresh, young, and dynamic startups or entrepreneurial ventures in their early stages to find a prospective match worth investing money in. This is done with the hope of having their initial investment amplified by typically 10 times by banking on the startups’ rise to profitability, in a given period. 

VC firms work in many ways such as-

• aggregating investors who are actively seeking profitable investment options,
• crowdfunding investment opportunities or
• reaching out to endowments for multiplying their dormant capital with profitable returns. 

The capital influx into a Startup is referred to as Venture Capital.

Venture Capital firms might have Investment Bankers working for them along with young and qualified industry experts and subject matter experts such as – successful, young, and qualified entrepreneurs and other industry-specific professionals. They can collect sufficient insights into the startup’s projected future and its status after a given period.

Hence, Venture Capitalists typically enter the picture of startup financing to not just provide options for funding but also to assist the startup to reach their projected goals by chipping in with-

• business networking,
• product or service development,
• management expertise,
• sales strategy,
• marketing and promotions strategy,
• and many other critical aspects of the entire business process.

This is a distinct advantage when you think of Venture Capital financing as against Angel investments.

Venture Capital funding can be made available in lieu of-

• equity financing,
• participating debenture,
• income note,
• or conditional loan

Generally speaking, VC investment buys stake in the company in the form of equity shares and get involved in the company’s management and critical decision making.

Comparative Analysis – Venture Capitalist vs. Angel Investor

As highlighted earlier, Angel Investors and Venture Capitalists are always on the lookout for investment opportunities.  While both are in it for reaping appreciable dividends on their initial investment, a few distinct features distinguish them from each other. This distinguishing feature is quite significant as it illustrates which is a better fit for budding entrepreneurs and startup owners to pitch their idea for seed funding.

Here are a few differences between Angel Investors and Venture Capitalists:

Who they are

So getting down to their working models, how they both operate, and where they accumulate the money for investing in companies, let’s shed some light on the details:

Angel Investor	Venture Capitalists
They are accredited investors who invest in small businesses using their own money. They are an individual or a group of professionals who have a high net worth or a combined net worth that is of very high value in addition to an annual income of at least $200,000, if not more.	Venture Capital firms or professionals usually are accountable to their investors in turn for divesting their money into suitable growth opportunities for long-term returns.  Their investors comprise investment companies, large corporations, endowments, and pension funds.
Often an angel Investor may be a close family acquaintance or a long-time associate or friend of the startup owner and are helping them out personally.	Venture Capitalists are thorough professionals as well as VC firms who are answerable to their investors and hence their involvement is professional always.   Venture Capital firms also typically have investment bankers on their payrolls that are constantly in search of new investment opportunities for their large panel of investors.

 

How they invest

Angel investors and venture capitalists are also marked separate typically by the stage of the company or business in which they choose to invest. So the investor you appeal to depends on which stage of the startup cycle your organization is in.

Angel Investor	Venture Capitalist
Angel Investors tend to come in at an early stage of the startup. Angel investors begin involvement at the start of the process because their risks are based on the individual they are investing in and not the business model or the product. As a result angel investors are likely to undertake more risks than venture capitalists.	Venture capitalists are more inclined to make capital investments during the product development stage and now the product is ready for the market. This allows Venture Capitalists to deploy their rich resources to practice and to take calculated risks to ensure they have the returns expected in the stipulated time.

Investment amounts

Angel Investors & Venture Capitalists also differ by the amount of capital that they influx into the chosen company.

Angel Investor	Venture Capitalist
Angel investors often invest in an individual, based on their past credentials.	Venture Capitalism is a professional approach towards investment, mostly because they are in turn answerable to their investors.
Angel investors invest a lesser amount of money into the startup landscape	VC firms invest more money into the startup landscape
The average angel investment deal is struck at $330,000 and typically is under $1m [Source: Small Business Administration]	The average venture capital deal is pegged at $11.7 million and typically range from $1m to $100m or over [Source: Small Business Administration]

 

Return expectation

Angel Investor	Venture Capitalist
Angel Investors may or may not closely follow the progress and developments of the startup they invested in.	A Venture Capitalist is deeply involved in the proceedings and management of the company they have invested in, to the extent they often introduce a panel of experts in the management committee to ensure that decisions are taken in favor of recovering the invested amount.
Angel investors may expect a more nominal return, somewhere between 20% and 25%.	Venture Capitalists invest the sum for a longer time with a lock-in period, so it comes as no surprise that they might expect a return on investment that is typically targeted at doubling their investment (to seeking returns of 10x or more).

An investor’s role in the business

It goes unsaid that both – Venture Capitalists and Angel Investors expect monetary returns and/or some sort of control in how your business runs to ensure that the money that they invested into the startup earns them a high return on investment.

Angel Investors	Venture Capitalist
Angel Investors come with personal background and invest in the individual rather than the idea or the concept and hence it is not uncommon to see them personally mentor the entrepreneur they are investing in.	Venture Capitalists often introduce their panel of members such as entrepreneurs, experts, and even mentors in the Board of Directors to ensure that they arrive at the desired end-result.
The mentoring might not always be strictly professional, it might comprise of suggestions about running the business, help with networking or help with decision-making.	Mentoring is typically confined to professional decision-making consisting of recommendations and business advice.

Now that you know the distinguishing features of both, you must develop a strategy to pitch to the identified investor.

How to pitch to investors

What do you think about your choice of investors? Hopefully the above guidance can steer your pathway to selecting your investment route.

Regardless of what you choose – whether you want venture capitalists or angel investors to invest in your startup, preparations need to be made beforehand. The investment pitch or presentation needs to be foolproof as your business plan will be scrutinized carefully.

It is advisable before going on to pitch one should conduct thorough research on the background of your investors. This will ensure you find ones that are more inclined to your line of thoughts.

During your pitch, show investors your business plan, financial statements and projections, marketing strategies, and market analysis. The commercial aspect of the business will also need to be detailed such as the expected figure of investment, annual turnover figures, profit and loss balance sheet, liabilities, fixed assets, and so on.

Hope this article shed some light into your investment options with Angel investors or Venture Capitalists. Either way, you can be rapidly on the pathway towards executing on your startup idea. Good luck!