Worthworm Wisdom

Insights for entrepreneurs & investors

What’s the difference between an angel investor and venture capitalist?

Posted by admin on 2013-12-31 03:43:27

There are so many terms and concepts thrown around in the business funding world that it could use its own dictionary. One particular area where there seems to be confusion is the different types of investors. Many entrepreneurs use “angel investor” and “venture capitalist” (or “VC”) interchangeably because they consider both to be sources of funding. However, these two types of investors are actually quite different, and these differences may clarify which one is the best fit for your needs.

The principal difference between angel investors and venture capitalists is that angels invest their own funds, while venture capitalists invest money that they’ve raised from institutions, pension funds, wealthy individuals, and the like.

Statistics suggest that an angel investor usually devotes $50,000-$150,000 to any one transaction, while venture capitalists invest a far larger amount in each transaction. As a result of their larger investment, VCs typically have a longer due diligence process and may ask for more than just a percentage of your company, such as a board seat, involvement in subsequent rounds, or other more complex terms.

In recent years, a new type of angel investor has emerged that bridges the gap between angels and VCs: the so-called “super angel.” These very wealthy individual generally participate in a funding transaction alongside a venture capitalist and invests a considerably greater amount of capital to each transaction than the traditional angel investor.

When considering which type of investor is right for you, ask yourself a few key questions:

1. How much money does my venture need to make it to the next milestone? If it’s in the low $100,000s, an angel investor might be a good fit. If you need more, consider speaking with a VC.

2. How quickly do you need the funds? The venture capital process could yield more money for your business, but the due diligence process will also be longer than it would be for a typical angel investor.

3. Are you willing to create a board of directors or give up a board seat? These are common terms in VC deals, whereas angel investors are typically more interested in providing financial support without as much involvement.

If you decide that an angel investor is a better fit for your venture, consider using Worthworm to prepare for your first business funding meeting. Our Questionnaire contains over 70 questions that were crafted by seasoned investors and business experts. Going through this questionnaire before the meeting helps you put yourself in an angel’s shoes and think about vital questions that are important to them, as well as your venture’s chances for success.

Curious about how much your venture could be worth? Or looking for a world-class teaching tool? Or are you trying to do due diligence on potential deals?  Then try a subscription to Worthworm, and let us help you.