Raising the funds needed to fuel a project usually begins before the venture even gets off of the ground. In many cases, startup founders will use their own money to get things going, or they will borrow money from close friends or family. Of course, if they are really lucky, they may manage to nab some seed money from an angel investor or two. Although both angel investors and venture capitalists tend to invest in innovative startups, they are not quite the same type of investor. Here is a quick rundown of the differences:
Type and Level of Interest
In general, an angel investor provides capital at the very beginning stages of a company’s existence, perhaps before the business has even begun to take shape. This type of investor often has a personal interest in what the company is seeking to do, and thus decides to provide money because of his/her desire to see the vision of the company’s leaders come to fruition. This type of an investment is usually less about the financial return and more about a personal passion or internal satisfaction in witnessing the creation of something interesting.
A venture capitalist, on the other hand, usually comes into the picture once the company has been up and operating for a bit. Although venture capitalists also tend to invest in creative ventures, they usually do so after the company has demonstrated that it is on an upward trajectory. And, in contrast to the goals of the angel investor, this type of investment is generally focused on the receipt of a handsome return as the growing company continues to expand.
Amount of Money
The amount of money provided from an angel investor usually will not be as much as it would be during a later kind of fundraising round. This investment is often called seed money, and it is generally meant to be a rather minor contribution that will help the fledgling business to grow itself gradually. Granted, some angel investors are incredibly generous, but more often than not, this is a rather conservative sum of money that will just help with getting things started.
After a company has established itself in the market and started to churn out some real business, a venture capitalist may come in with a much higher sum to allow a company to capitalize on its growth potential. For the most part, the growing company will have to seek out prospective venture capitalists and have a well-polished pitch prepared to entice a decent capital infusion.
Given that the reasons for the investment differ, as well as the overall sum provided, the expectations between these types of investors no doubt diverges as well. An angel investor may serve as a mentor, likely providing advice and perhaps connecting leaders with important people within the industry.
Of course, venture capitalists may be able to offer management guidance and networking opportunities, but they are more likely to demand a seat on the board to ensure voting rights and a decent amount of clout with respect to the company’s decisions.