Angel Investors Vs. Venture Capitalists - The Complete Guide
Jan 19, 2023
Hi, I’m Christine Outram, the owner of Startup with Christine. I’ve personally helped hundreds of founders raise money for their business - I’ve even raised over $2.1M myself!
But it wasn’t always easy for me...
I learned the hard way the difference between angel investors and VCs, family and friends rounds, equity crowdfunding, private equity, grants, and everything in between.
And I made mistakes (lots of them!) that almost certainly cost me some deals.
I don’t want this to happen to you, which is why I write this blog.
I want growth and fundraising to come much more easily to you than it did to me.
Ready to be enlightened in under 7 minutes? Of course you are!
Angel Investors vs. Venture Capital:
Angel investors and venture capital firms (VCs) are both sources of funding for startups and small businesses. Angel investors are often wealthy individuals who invest at the earliest stages of a business and write a small check. Venture capital firms represent groups of wealthy individuals or companies and write larger checks for any stage of business (though typically they invest in later stage companies). Read on to find out what’s right for you.
What we’ll cover so you can up your game:
- Angel Investor: the definition
- Can anyone be an angel investor?
- Why Founders Choose Angel Investors over Venture Capitalists
- What is a Venture Capitalist? A more detailed explanation
- The Key Differences Between Angel Investors and Venture Capitalists
- The #1 Thing You Should Read If You’re Pitching Angel Investors
Freebies
- Free Fundraising Launch Checklist - in this freebie, I walk you through the steps you need to take if you’re planning to raise money from either angels or venture capitalists so you can save time and won’t be leaving money on the table. Swipe This Now!
- Finding Angel Investors, Fast - in this free on-demand training, I’ll show you the LinkedIn technique I used to raise $30k from angel investors in 5 days. Get This Free, Fast Training
Angel Investor Definition
Angel investors are wealthy individuals who are investing their own money into a startup (typically $25k - $100k per startup).
Can Anyone Be An Angel Investor?
No, not everyone is eligible to be an angel investor: you need a minimum net worth of $1 million, or $200,000 in annual individual income ($300,000 in joint income).
That’s right - angel investing is a game for the rich. The SEC (in an effort to protect those who can’t afford to lose their money ‘gambling’ on a startup) requires that all individual investors are accredited and can show that they have a certain level of wealth.
In other words, if you meet the net worth / income requirements, the SEC deems that you can afford to lose any money you invest.
You might think this is unfair. After all, if someone wants to invest in your business, why shouldn’t they be allowed to do so?
One of the biggest things I have learned in business is that there is almost always a legal way to get what you want. So while the SEC makes it difficult to raise money from non-accredited investors, it is possible.
Let’s say you have an Aunt. Even though she doesn’t meet the minimum income or net worth requirements to be an angel investor, she really believes in you and wants to write you a check.
There are two ways (that I know of) that you can use to make this happen.
A HUGE watch out here - this is not legal or even how-to advice! Always consult professionals.
Two ways you can get people who don’t meet the SEC angel requirements to invest:
- Raise money through equity crowdfunding. Your aunt may still be capped on the amount of money she can invest (based on her income and assets) but it is a legal way for individuals who do not meet the official angel requirements to invest in your startup.
- File what is known as a Form D with the SEC and follow one of the rules - usually rule 506(b) or rule 504 that allows for non-accredited investors to be issued securities. Note securities in this context, is simply a fancy way to say that you’re issuing stocks, equity or something that has monetary value.
In one of my previous startups, we filed a Form D with the SEC and used Rule 506(b) to raise money from non-accredited investors.
Would I recommend it? Probably not. It’s a legal hassle and I think should only be used if you absolutely can not convince accredited angel investors to contribute to your fundraising round.
You can also read up about the SEC rules for private placements (when an individual invests in a company) so you’re more informed.
Most early-stage founders end up raising from accredited investors because it’s easier to remain in compliance, but this brings us to our next question:
Why Choose Angel Investors vs. Venture Capitalists?
Here’s the number one reason why founders choose Angel Investors versus Venture Capitalists:
Because Venture Capitalists won’t give you the time of day. (Sad, but true).
To understand why this is, you need to understand what a Venture Capitalist is, and the key differences between how a Venture Capitalist and an Angel Investor thinks.
What is a Venture Capitalist?
A Venture Capitalist, or VC for short, is someone who works at a Venture Capital firm. Venture Capital firms pool money from institutions and other high net worth individuals and use this funding to invest in startups. The Managing Director of the VC firm is the person who makes the final decision about investments (interestingly, the people who are invested in the VC’s fund don’t get a say).
There are some pros and cons to this model:
Pros:
- Venture Capitalists are drawing from a pool of money so they can write much larger checks (often millions of dollars)
- Because VC firms raise money from successful/wealthy people, they are often connected to a network of successful founders and advisors who can help your company grow
Cons:
- Venture Capitalists are more risk averse than angel investors because they are investing money on behalf of their investors (also known as Limited Partners or LPs)
- Venture Capitalists are looking for more proof than Angel Investors that your startup is already working and is poised to grow
A Handy Tip:
While there are some VCs that advertise that they invest in early stage companies, what they really mean is “we invest in early stage companies that have already figured out how to grow.”
But Christine! I hear you say. “I know a friend of a friend of a friend who got funded with just a sketch on a napkin - can’t I do the same?”
Getting funded without growth and sometimes without a product does happen. But in these situations, the venture capitalist almost always has a pre-existing relationship with the founder, or the founding team has a proven track record of growing and selling businesses.
Most early stage founders don’t have these relationships or history in place. And unless your business is a runaway early success, it is unlikely that a venture capitalist will take the risk on your venture.
This doesn’t mean you should make relationships with VCs early (this will help you at a later stage) but it does leave you looking in other places for early stage investments.
Enter the angel investor.
Why Angel Investors Are Suitable For Early Stage Companies
There are three main reasons why angel investors are willing to take more risks than venture capitalists:
- The check size is smaller (so they have less to lose)
- They are calculating risks for themselves, not on behalf of other people
- By getting into your fundraising round early, they are betting on getting better deal terms (which pays off in the long run if you make it big!)
Whichever path you choose - angel investors or venture capital - as a founder, if you understand the key differences, you are at an advantage. That’s why I’ve summarized them below:
The Key Differences Between Angel Investors and Venture Capitalists
The Size Of their Investment:
Angel investors typically invest smaller amounts of money, usually in the range of $25,000 to $100,000, while VCs typically invest much larger sums, often in the millions of dollars.
When They Invest:
Angel investors are more likely to invest in early-stage companies, while VCs are more likely to invest in later-stage companies that are looking to scale.
The Level Of Involvement in Your Company:
Angel investors are often more passive, providing capital and offering advice, but not taking an active role in the management of the company. VCs, on the other hand, often take a more active role, sitting on the board of the company and providing strategic guidance.
The Terms of Investment:
Founders usually raise money from angels on a convertible note or a SAFE (simple agreement for future equity). When your company is at a later stage and raising from VCs it is more likely that you will simply be giving a percentage of the company directly.
Exits:
In terms of exit, Angel investors usually look for a liquidity event such as an acquisition or IPO. Venture capital firms, on the other hand, usually have a longer-term investment horizon and are looking for a much larger return on their investment, often through an IPO or a strategic acquisition.
In summary, angel investors and venture capital firms are both sources of funding for startups and small businesses, but they operate in different ways and have some key differences. Angel investors are typically wealthy individuals who provide capital to early-stage companies in exchange for equity, while VCs are professional investors that raise money from institutions and high net worth individuals and use it to invest in startups. Angel investors typically invest smaller amounts of money, while VCs typically invest much larger sums. Angel investors are often more passive, while VCs often take a more active role in the management of the company.
My #1 Thing To Read If You Plan To Raise From Angel Investors:
The quickest way to understand if you are ready to attract one of these wealthy individual (a.k.a. an angel investor) to contribute money to your startup, is to Think Like An Angel.
Most founders make the mistake of thinking “I have this cool product, idea, napkin sketch and when someone sees it they will be sure to bet on me!”
I made this mistake in my first business!
In reality, I learned the hard way that investors are not backing ideas, they are backing the potential for that idea to generate crazy returns.
Investors are selfish and are in it for the money. If they were not seeking a financial return, they would donate their money to a non profit organization. And that’s not you!
This is why I always recommend that founders read the book Angel: How to Invest in Technology Startups by Jason Calacanis.
Jason is a divisive figure in tech circles, but he has, better than anyone on the scene, boiled down how angel investors make decisions to invest and what they are looking for in a company.
Even though this book is angled towards people who want to become an angel investor, it is invaluable reading for founders too.
After reading the book, you’ll have a clear idea of what you need to do to attract and convince angels to invest.
Want Some Freebies? Of Course You Do!
- Free Fundraising Launch Checklist - in this freebie, I walk you through the steps you need to take if you’re planning to raise money from either angels or venture capitalists so you can save time and won’t be leaving money on the table! Swipe it here.
- Finding Angel Investors, Fast - in this free on-demand training, I’ll show you the LinkedIn technique I used to raise $30k from angel investors in 5 days. Grab it here.
