Startup financing refers to the primary introduction of funds, through various sources of finance, to convert the idea into the product or service, by commencing the business. Angel Investor and Venture Capital are the two major alternatives to startup financing. Angel Investors are wealthy individuals who facilitate young entrepreneurs and startups with financial backing in the early stages.
On the contrary, Venture capitalist is a firm, comprising of a team of financial experts or a professional person, who derive their investments from annuity funds, insurance companies, provident funds, high net worth individuals, etc. to invest in startup firms and small businesses. The difference between the angel investor and venture capitalist are discussed hereunder, take a look.
|Basis for Comparison||Angel Investor||Venture Capitalist|
|Meaning||Angel Investors are affluent individuals, who help startup founders in starting their business by infusing their money, in exchange for an ownership stake or convertible debt.||Venture Capitalist refers to an organization or a part of an organization or a professional person who invests in budding companies, by providing them capital, to help them grow and expand.|
|What is it?||Individual investors, who are often successful businessmen.||Professionally managed public or private firm.|
|Investment||Investment is made in the pre-revenue business.||Investment is made in the pre-profitability business.|
|Money||Use their own money to make investment.||Pools money from insurance companies, funds, foundations, and corporations, to make an investment.|
|Investment size||Less||Comparatively large|
|Screening||Undertaken by the angel investor according to their own experience.||Undertaken by a team of experts or by an outside firm which specializes in the same.|
|Post Investment role||Active||Strategic|
|Stresses on||Investment criteria related to ex-post involvement.||Investment criteria related to initial screening of investment opportunities.|
|Approach to agency risk control||Incomplete contracts approach||Principal-agent approach|
Definition of Angel Investors
Angel Investors or otherwise called as Business Angels, Seed Investors or Informal Investors are the individuals with high net worth who often provide funds to the budding companies or say young entrepreneurs in their early stages.
Angel Investors possess surplus funds, which they seek to invest in the firms that can fetch outsized returns to them than they would generate normally. And for this purpose, after ascertaining the growth potential and returns on investment, in the idea, they invest in startups in exchange for a fair stake.
The financial backing is either in the form of lump-sum investment, to facilitate the emerging firms in establishing successfully or it can be a constant infusion of funds to help the firm pass through the initial stages swiftly. The three ways in which funds are supplied by the angel investors are a business loan, convertible preferred stock and common stock.
When it comes to terms and conditions of the contract, they are also quite favourable, as their investment is on the entrepreneur commencing the business and not on the idea or the success potential of the business.
Some business angels either actively participate in the businesses they inject their money in while some only provide money. There is a large number of angel investors who provide money to the startups by way of crowdfunding.
Definition of Venture Capitalists
Venture Capitalist is a part of a large organization or a professional person, who uses funds of third parties to invest in the new or rapidly growing venture, often risky by infusing capital to the firm, called as venture capital.
- The third parties are the investors in venture capital firms such as banks, financial institution, insurance companies, pension funds, corporations and high net worth individuals. It is like funding startup firms or small businesses, who are not able to raise funds from the financial market.
- The startup company is promoted by young and qualified entrepreneurs, who do not have sufficient funds to turn their innovative idea into reality.
Venture Capitalists provide long term finance as well as assist the startups in business networking, development of new product or service, management expertise, sales strategy, advertising strategy, and so forth. Venture Capital Financing can be made in the form of equity financing, participating debenture, income note or conditional loan.
In venture capital financing, the investment is made for a long term, i.e. 3 years or more. Normally, they buy equity shares of the company to get the right to participate in the company’s management and also assist in their initial stages.
Key Differences Between Angel Investors and Venture Capitalists
The following points are substantial so far as the difference between angel investors and venture capitalists is concerned:
- Angel Investors are the individuals, usually wealthy, who invest their money in a high-growth potential budding company, in return for an ownership stake. On the other hand, Venture Capitalist refers to a person or firm so created to provide funds, by pooling investment funds from a number of sources to invest in new and emerging firms and entrepreneurs to help them grow and expand in the market, generate good returns to the investors.
- Angel Investors are individuals with exceptional net worth, who are successful businessmen. Conversely, Venture Capitalists are the efficiently managed public and private organization.
- Angel investors invest in a business in their initial stage, i.e. pre-revenue stage. As against, venture capitalists invest in a business which is passed through their initial stage, i.e. pre-profitability stage.
- Angel investors are well-off individuals, who invest their own surplus money in new and high growth potential businesses. In contrast, venture capitalist pools money from a variety of sources such as insurance companies, funds, foundations, and corporations, to invest the same into businesses which are rapidly growing and seeking financial support.
- Amount invested by angel investors in businesses is comparatively lesser than the amount invested by venture capitalists.
- When it comes to screening, angel investors undertake screening procedure as per their knowledge and experience. On the other hand, screening in case of venture capitalists is performed by a team of experts or by an outside firm, which specializes in this regard.
- Angel investor plays an active role in the company in which they invest their money in. However, venture capitalists play a strategic role in the company after they make an investment in a company.
- Angel Investors mainly focuses on investment criteria concerning ex-post involvement. As against, the primary focus of venture capitalists is on initial screening of investment opportunities.
- The incomplete contract approach is followed by angel investors concerning agency risk control. Conversely, the principal-agent approach is pursued by venture capitalists.
Both angel investor and venture capitalists aim to provide funds to entrepreneurs or small business having an innovative idea and viability of the business. Further, they are more inclined towards ideas relating to science and technology.
Angel Investors are former entrepreneurs, who provide their own money to the new entrants for establishing successfully. On the other hand, venture capitalists, look for an influencing idea, a strong product and an effective business model that possess an exceptional competitive advantage and qualified entrepreneur.