What is the Difference?
When asking yourself how to fund your business, knowing the difference between angel investors and venture capital investors is important to make the right financial choices for the future of your business. Both angels and venture capitalist firms cater to innovative startup businesses, and hope to earn a healthy return on investment (ROI). That being said, there are a number of important differences between venture capitalists and investors.
Angel investors use their personal finances to fund a startup, therefore, it is fairly common to give away part of the company because of that risk. On the other hand, venture capitalists are part of a company typically a group of professional investors whose money comes from foundations, pension funds, corporations, and individuals. These investors are known as limited partners. General partners work closely with founders or entrepreneurs to ensure the fund is properly managed and the companies they invest in developing.
When and How Much?
Angel investors are more likely to invest at the early stages of a startup. They choose businesses they see becoming profitable, but this is riskier for them. Therefore, angel investors will not fully fund the business but give you enough to get you off the ground. Angel investors may want a return between 20% and 25%.
Venture capitalists are more likely to invest in businesses that are already established to reduce their risk. If you are looking to expand your business, you should pitch to a VC. Once venture capitalists are convinced and have invested, it is then their role to help build successful companies, which is where they add real value. Venture capitalists typically expect a return of 25% and 35%.
Motivations and Responsibilities
Because they invested their money in your business, both Angels and VC want your business’ equity in return and may act as a mentor and have a say in how the business is run. This includes helping you form relationships with lawyers, accountants, and banks. Venture capitalists might require you to establish a board of directors and give them a seat on it.
Prepare for your Pitch
First, do research and find the ones that align most with your business. Be ready to show your business plan, financial statements, financial projections, marketing plans, and market analysis. Know how much money you need or are asking from them. Specifically, how you plan to use the money and how much has already been invested in your business.