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Is your business finally building up the momentum you need to propel you to the next level, or do you still need an extra push to get there? Do you need an influx of capital to help reach your next set of goals? Could you benefit from involving others with years of business and financial experience who also have access to useful business contacts? Do you want to avoid taking out a traditional bank loan, or can't get approved for one? Depending on how you answered these questions, looking for an equity investor might be a good option for your business. Two of the most common types of investors are angel investors and venture capitalists. But what's the difference, and which one would be right for your business? In this article, we will explore the differences between angel investors and venture capitalists and how to figure out which type of investor you should look for.

  • What Is an Equity Investor?

    An equity investor is someone who invests money into a company in exchange for shares of stock in that company. These shares represent a percentage of ownership of the company. The investor is incentivized by the fact that their shares can earn them cash dividends from the company's profits in the future or that the shares can be resold further down the line for capital gains. By purchasing stock in the company, equity investors may also gain varying levels of control of the company based on the percentage of the company they own and the agreements put in place. Equity investors can also bring high levels of business and financial expertise to a company as well as valuable business connections they may have. Angel investors and venture capitalists are both equity investors but operate differently from each other.

  • What Is an Angel Investor?

    An angel investor is an individual who invests their own money into various companies that attract their attention. Usually, these are people who have become successful in the past with their own businesses and have generated a substantial amount of wealth that they can then invest in other companies. Some angel investors treat investing as somewhat of a hobby or a way to support small emerging businesses that interest them on a personal level. Naturally, they will want to see a return on their investment, but the financial incentives are not necessarily the primary motivating factor for them. On the other hand, some angel investors will treat investing as much more of a business, with the monetary gains involved being their top priority. Some angel investors will invest in areas where they have personal business experience and expertise, while others will invest in things they may be interested in but don't really have any experience themselves.

  • What Is a Venture Capitalist?

    Venture capitalists are investors that raise the money they invest through other investors. Typically, a venture capitalist will start an investment firm as a "general partner" and will seek out "limited partners" that will pool their money together to provide a source of funds that the investment firm will invest. The venture capitalist then will look at different companies they think can bring a good return on investment for the firm, and when they see something they like, they will pitch the idea to their limited partners.

    Venture capitalists typically have a much more specific and directed aim in their investing and operate much more formally than an angel investor would. For example, a venture capitalist may be looking to invest in a particular industry they feel they could capitalize on in order to bring good returns to their investors. If they see an opportunity they like, they will attack it with more of an engineered precision to produce the best results possible. In comparison, angel investors might want to invest in companies that are involved in a field they find personally intriguing. They may think a particular investment is a good idea and will conduct a more casual experiment to see what happens. Venture capitalists approach investing, typically, from a much more serious posture than angel investors.

  • Pitching to Angel Investors vs. Venture Capitalists

    Pitching your business to an angel investor will be a lot more casual and informal than pitching it to a venture capitalist. With an angel investor, you may meet in person or do some video conferences. Pitching to a venture capitalist will be a much more structured and formal process. For example, you would typically do a full-on presentation in front of the entire investment firm presenting your business plan and using some type of slide show displaying statistics, graphs, and charts. This would be the first in a series of several meetings where the investment firm gets more familiarized with you and your business in a formal business setting.

  • Investment Amount

    The amount of money angel investors and venture capitalists invest in companies differs. Angel investors typically invest smaller amounts than venture capitalists. On the lower end, an angel investor may invest $10,000; on the higher end, it could be $250,000-$1,000,000. Venture capitalists may initially invest anywhere from $250,000-$3,000,000 in a company. Venture capitalists also invest in what are called "rounds." They will make an initial seed investment in a company and then might go through a series of investment rounds over time where they invest an increasing amount of money each round.

  • Developmental Stages of Companies

    These two types of investors usually invest in companies that are in different developmental stages. Angel investors will typically invest in earlier-stage companies more often than venture capitalists. Often these companies are still in the idea stage and are just starting out, putting together prototypes or developing working models of their ideas. Venture capitalists are more likely to invest in companies that are more developed, have gained some traction, earned revenue, and have proven themselves a bit in the market. The developmental stages of companies these investors put their money into also reflect the amounts of money they typically invest. Since angel investors invest smaller amounts of money, they can be more likely to invest in younger, riskier, and less proven businesses. Venture capitalists invest larger amounts and therefore look for less risky options and more established companies to invest in.

  • Types of Companies

    The types of companies that angel investors and venture capitalists invest in may differ. Angel investors can be either more diversified in the companies they invest in, or they may focus on one particular area. If an angel investor has a background in a specific industry, they may focus their efforts there to apply their expertise and help other companies develop and innovate in that field. Other angel investors may invest in a wide variety of different types of companies. They could choose companies that operate in industries they'd like to learn more about, have a personal interest in, or believe will become successful.

    On the other hand, venture capitalists typically have a much more focused approach to investing. Venture capitalist firms may solely focus on investing in one particular industry, such as real estate or software. Often times venture capitalists have a high degree of experience in the fields they invest in. This allows them to have a deeper understanding of how the market works, what the competition is like, and the growth potential of a specific industry. This type of in-depth knowledge allows them to make better investments and improve their chances of success. Venture capitalists also want to invest in companies that have a high level of growth potential. They don't just want companies that have good ideas and can succeed, but they also want companies that are scalable and can bring back large returns to investors.

  • Which Type of Investor Is Right for You?

    Whether an angel investor or venture capitalist is the right type of investor for you will largely depend on what stage of development your business is in and how much funding you need. If you are just starting out in business, haven't gained much traction, and are just looking for some money to get your company up and running, an angel investor is probably the right fit. If you are already established in business but are looking for a larger amount of money to really expand your company, then a venture capitalist may be the better option. Depending on the angel investor, they may or may not have business expertise to bring to the table. In contrast, venture capitalists will generally have lots of applicable business experience that can help your company grow. Angel investors are typically much more casual and informal. Venture capitalists are much more formal and structured. They are investing other people's money, so they will normally have a more stringent process in choosing companies they will invest in.

    Partnering with investors is a big decision. If you choose the wrong investor, it can be hard to exit the relationship, and you may be stuck with them for quite some time. It's important that you view your investors as people you will have an ongoing relationship with rather than a quick way to gain access to capital. You will want investors who believe in your company and can offer you other contributions besides funding.

Are You Starting Your Own Company?

If you are starting your own company, InCorp can help with our business entity formation services. We can help you establish a separate business entity, such as an LLC or corporation, and we also provide registered agent services. You can also use our business entity management system and iOS app to help manage your business, letting you stay on top of critical due dates and providing a way to access your essential business documents easily.

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