Difference Between Venture Capitalists and Angel Investors

Every so often, accountants get asked some dumb questions.  Some of the questions I’ve received are “I never signed up for insurance, so why does medicare keeps getting deducted from my check?”  Or “can I get paid in cash so I don’t have to pay my child support?”  Even ones like “I don’t have a social security card/passport/drivers license, but can I use my friends information?”  Although with all the dumb questions, we even get some great questions.  Like “what is the difference between Finance & Accounting” like I answered before.  So now I’ll answer the next best question I’ve ever received, “what’s the difference between Venture Capitalists and Angel Investors?”

Startup companies want to attract both angel investors (Angels)  and venture capital funds (VCs).  Well that is of course if they need to.  Some are lucky enough to have Uncle Mike or are smart enough to lie cheat and steal the capital they need.  If not, they go the other way of trying to raise capital, Angels and VCs.  They provide the capital necessary for getting a small company off the ground and allows them to concentrate on business and not cash flow.  Although Angels and VCs serve a similar purpose, there are important differences between the two.

Definitions

Angel investors are private investors who invest in smaller companies. Even though some Angels are organized into networks or groups and pool investments, most Angels generally invest by themselves.

Venture capital fund is different because it is a substantial pooled investment, drawing on numerous wealthy investors.

Attracting Investments

Since Angels act privately, they vary in investment areas take on investments on a case by case basis.  VCs focus on emerging markets like technologies and software companies, and have greater amount of accountability for investments.  So Angels typically are easier to attract because they can be “talked into it” essentially, but VCs often have many more objectives to match and therefore harder to confirm.

Investment Focus

Angels focus on early stage company types, and concentrate on expanding the company with the angel’s investment to a more attractive size toward VCs. VCs do invest in the earlier stages, but venture capital funds also invest with the purpose of taking the company to the IPO stage and stay with the company for long term investments.  VCs, depending on the deal made, either take a cash pay-out or continue with the investment and take a back row seat on getting a higher ROI for what they have helped create.

Investment Size

Angel investors typically invest under $1 million.  There is no set guidelines as some have invested millions upon millions and some just invest a few thousand.  There is no form to fill out or group to join.  Anybody willing to give you money and meet the definitions is considered and Angel investor.   An Angels investment is used to expand the company to the size that attracts larger venture capital investments, mostly above $1 million.

Expected Returns

Both Angels and VCs tend to want a high ROI for their investments to help offset their frequent losses.  Although compared to one another, Angels often expect a slower, smaller return on investments than venture capital fund.  Sometimes Angels are not only in it for the money, therefore it’s the other driver that helps give the Angel more patience.  VCs have one purpose, and that’s to maximize their investment.  I’m not saying that all VCs are cold hearted @$$’s but they are not there to be your friend.  Truthfully neither are the Angels, but they are not given the name “Angel” investors for nothing.  They are there because they want to be there and want create something special.

All in all, you need to make sure of your expectations and your investors expectations before you move into any contract with an investor.  This isn’t just common sense, it’s also common practice to protect yourself and the employees of the company.  The last thing anyone wants, especially in this economy, is to have doubts about the company.  The great thing is that even WITH this economy, there are still plenty of Angels and VCs out there willing to help.  So go out there, spread the word, pitch your idea, and go make millions!!!