Startup Guide: Venture Capital vs. Angel Investor 2 years ago
Raising capital or having enough money is the first part of starting a business, and most of the time, entrepreneurs look for different funding sources.
While taking out a loan from a bank or borrowing money from family and friends can be a great idea, the repayment terms and high-interest rates on those options may make them unsustainable in the long run.
Consider your ability to repay them and whether you can continue to rely on those sources even after starting your business–because, sure enough, you will need even more capital once you begin operating.
But have you heard of angel investors and venture capitalists? Those two are common funding sources apart from borrowing or applying for loans.
Angel Investor vs. Venture Capitalist
Angel investors are usually wealthy individuals who invest in a business and, commonly, in startups. They often invest in startups that have the potential to grow and expand.
Although not all angel investors are accredited, many of them are. They may be accredited following the standards defined by the Securities Exchange Commission (SEC).
On the other hand, Venture Capitalists are private equity investors that use investment funds and lend them to businesses with high potential growth in exchange for an equity stake. This could involve providing startup capital or assisting small businesses that want to grow but lack access to equity markets.
|
Angel Investor |
Venture Capitalists |
|
|
Who |
Rich and influential individuals |
Fund managers called general partners representing a group of professional investors called limited partners and/or family conglomerate offices |
|
Source of Capital |
Investments usually come from their own money–either personal wealth or business funds |
They source most of their funding from large investment institutions including banks, businesses, and pension funds etc. |
|
Preference |
Startups in early-stage businesses with high potential growth |
Companies that are more developed and with proven track records. |
|
Financial capacity |
Relatively limited financial capacity and which makes them unable to finance the full capital requirements. |
Much larger financial capacity because they pool funds from different sources. |
|
Benefits |
Provide knowledge and personal experience since they are most likely to be successful entrepreneurs. |
Provide ample knowledge and network opportunities. |
|
Risk to Entrepreneurs |
Compared to other funding options, entrepreneurs take less risk because angel investors often do not require repayment if your venture fails. However, expect that they will require a sizable ownership/equity in your venture, which will limit your ability to manage it. |
Similarly, Venture capitalists do not require repayment if the venture fails which also presents low risk to entrepreneurs. But they often take equity and board position, including giving up part of your business, in exchange for investment.They also are stricter with legal protections such as liquidation preferences in case the company closes. |
What these two have in common is that compared to business loans, they don't have monthly repayment requirements.
However, that does not mean that they won't be getting a return on their investment. Instead, they will require ownership or equity in your business. Therefore, they can sell those shares for more than they originally paid once your business expands and gains value.
When it comes to which investor is better for getting an investment for your startup–there is no right or wrong decision. It only depends on what stage you are in and what suits your business.
It is still very important to assess what will benefit your business and what can help you in the long run. If you want to read more resources about startup, you may visit Digest.ph
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