What is Angel Investor?
Angel Investor: An angel investor an individual with a net of $1 million or more (excluding their personal residence), or who has an income of $200,000 per year (or $300,000 for a married couple). They differ from close friends or family investors as these individuals don’t have a personal connection and choosing to invest in YOUR COMPANY rather than YOU.
What is Venture Capitalist?
Venture Capitalist: A venture capitalist is usually formed through Limited Partnerships where limited partners invest in the venture capital fund. The fund manager then invests in the best deals which will lead to the highest return for the limited partners.
Other notable differences:
- Angel investors generally invest lower amounts ranging from $25K-$100K in a business while the average Venture Capitalist invests about $7 million.
- Angel investors are more likely to invest in the earlier stage of development
- Venture capitalists will generally spend more time researching investment prospects
- Angel investors typically don’t consult anybody for decision-making while a venture capitalist will rely on a committee to help navigate decisions
Broadly the goals of both the Angel Investor and the Venture Capitalist is almost the same. However there are a few broad distinctions:
- The money invested belongs to whom?
- How much money gets invested?
- Size of the investment
- Contribution of the investor on Board
With so much of investments taking place all around the world. The startup ecosystem has primarily coined these terms to distinguish investors based on the above 4 broad factors.
Who are Angel Investors & Why do you need them?
Angel Investors are high net worth individuals/family offices. Angel Investors generally look at companies which have just started to take a shape and is in its early days of business / idea. The money invested helps the business take the idea off the ground to the market. The investment ticket is small as its being invested in individual capacity by these wealthy individuals or family offices.
There are startups who need a small amount to start their project and at this stage they are looking to manage the business on their own without much inputs from the investors. It is easier for entrepreneurs to approach these angels and get a small investment to have things moving the right way.
When to approach Angel Investors?
You should approach an Angel Investors when you are at the last stage of your product development and about to launch. An idea may not be enough for the investor.
Raising money from Angel Investors
Raising capital from these angels is primarily focused at building the product and service. The money raising here is less complex as its based on personal comfort of the investor that means faster decisions, simple share holder agreeements and shorter due diligence. These individuals generally don’t have a board seat as well.
Returns Expected by Angels?
Broadly they look at 10x returns within a time frame of 3-5 years. There risk is pretty much high as they invest at very early stage of business.
Who is a Venture Capitalist?
In simple terms Venture Capitalists are professional investors who deploy funds from corporate entities, institutions, investors into early stage/ high growth companies. The fund deployed by them is not owned by them unlike the angel investors.
What is a Venture Capital Fund?
Its a professional managed fund sourced from investors / institutions interested in exponential returns by investing in equity of early stage/high growth/ small & medium enterprises.
When to approach Venture Capitalists?
Venture Capitalists generally prefer a larger ticket size and invest in the companies that have launched its product and has gained traction already for the product / service. When you are ready to take your company to a large platform and you need funds for Expansion/ Marketing/ Infrastructure/ Manpower you should approach VCs.
Raising Money from VCs
The ticket size of VCs is to the tune of minimum $2-3 million as they look to invest for rapid growth and expansion of these companies. Venture Capitalists are professional investors having larger responsibility towards their stake holders. The processes are tough and exhaustive. VCs do a strict due diligence and draw lines as & when required. Most of the VCs don’t make the decision themselves its driven primarily by a group of people of their firm who jointly take a call on the investment. They will have a fair control over your business and will monitor it periodically (because of their fiduciary duty towards their investors) and likely to gain a seat on your board.
Returns Expected by VCs
Angel Investors and VCs normally look for 10x returns or 20%-30% annually on their investment made. They generally have a 5 year time frame for an exit. It also depends upon the growth/involvement and many other factors.
Angel Investors invests their own money and generally are guided by their faith on the promoter and his business. VCs are professional investors deploying third party funds and more process driven because of their responsibility towards getting returns for their investors.
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