VENTURE CAPITALIST VS. ANGEL INVESTOR: 7 DIFFERENCES AND WHO TO PITCH TO?

VENTURE CAPITALIST VS. ANGEL INVESTOR

Venture capitalists and angel investors are sources of capital you can pitch to finance your startup or expand your operation; however, they are significantly different.

An entrepreneur’s nightmare is raising capital to jump-start a startup. Most people kill their entrepreneurial dreams when they imagine the daunting task of acquiring the needed capital to start operations. However, if you want to keep your business idea alive, you should cross various bridges to meet with the right people who can buy into your idea and invest.

This article discusses two investors available for you: venture capitalist and angel investor. You can get money from either of these finding avenues depending on the stage of your business. Let’s consider some notable differences between them and who you can pitch to.

Venture capitalist vs. angel investor

Angel investors and venture capitalists are investors who take calculated risks to invest in a venture or a business, hoping that they will earn a return on investment. They are different from banks that lend you a loan that you pay with hefty interest. VCs and angel investors put money into your business and take a share of your profit as compensation for the investment.

Knowing the difference between these two finance sources will help you avoid wasting time on what does not work and focus on pursuing funding that best fits your style of business. Let us consider some seven unique differences between angel investors and venture capitalists.

1. Their mode of work

One major difference between an angel investor and a venture capitalist is the source of money they invest.

Venture capitalists can be an individual, a group of people, or a firm interested in small companies. They are established to pool money from various large corporations, investment companies, or pension funds and use this money to invest in good business ideas. Therefore, VCs do not dive into their pockets to get the investment money. If you approach them with a business idea and are impressed, they will use the pooled money to invest in your company.

On the other hand, angel investors are individuals who use their cash to invest in small businesses they believe will give them returns in the long run. Angel investors are often accredited by regulatory bodies and meet the following requirements:

  • Have a minimum yearly income of $200,000. If angel investors file tax returns with their spouses, their combined annual income should be at least $300,00. They could be small business owners, family members, or friends. 
  • Have a net worth of at least $1 000,000 regardless of their marital or tax filing status.

Angel investors are interested more in helping your business start before they can begin profiting from it. This means they may have more reasonable terms than venture capitalists, whose main focus is ROI. Angel investors come to your rescue because they believe you will succeed in the long run.

2. When they invest

Different businesses have varied growth levels, with some just starting while others could be established franchises. Regardless of the stage of your business, you may still need money to grow it to the next level. Venture capitalists and angel investors can fund your business at different stages.

Venture capitalists often prefer investing in an established business to minimize the risk of losing money. Startups are unpredictable, with many failing to advance past the launch stage. Venture capitalists would want to cushion themselves from these potential losses by waiting until a business is past the launch stage.

In contrast, angel investors love investing in startups since they aim to help small businesses stand on their feet. They examine your business potential and its ability to be profitable, even if the business does not have proven accounting figures pointing towards profitability. Angel investors undertake greater risks than venture capitalists.

 You can pitch to angel investors if you have just launched your business and need money to actualize your ideas. They will likely give you the money you need to start your business. However, try venture capitalist if you run an already established company and look for funds to expand your business.

3. Different investment amounts

Before you go pitch for either angel investors or venture capitalists, you should know your financial needs. These sources of capital differ in the amount of money they are willing to offer you.

Since angel investors use their own money to finance various businesses, they will likely give you less money than venture capitalists. According to SBA, they can invest between $25,000 and $330,000, but the figure can go as high as $75,000 if angel investors combine forces.

On the other hand, venture capitalists can invest an average of $7 million to $11.7 million into your business. However, you will have to deal with the rigorous application process to convince them to invest in your company.

Though angel investor provides quick and easy financing if you impress the investor, the amount is often small, meaning that you may need other sources of finances to realize your dream. You may be forced to turn to financial institutions for personal loans or friends and relatives to add to the deficit.

If your project needs big investment to facilitate expansion projects like purchasing new machines, you can pitch to venture capitalists. But if you do not need a small investment to cater to operational costs, angle investors could be your answer.

4. Their role in the business

Every investor who pumps money into your business wants something. Venture capitalists and angel investors both want your business equity, which gives them control over the company’s operations. When they invest money into your business, they aim to reap a high return on investment.

Venture capitalists can claim a seat on the board of directors after investing in your company so that they know first-hand the steps you take to make profits. 

However, angel investors may act as mentors, providing you with advisory services about running the business. They may give you suggestions about banks, accountants, and lawyers and help with decision-making.

Venture capitalists may be interested in your operation and major decisions, but they may not offer mentorship or advisory services.

Venture capitalists are interested in companies whose products have a higher competitive advantage, a wide potential market, and a talented management team. Once they have invested in your company, they can help you establish your company’s strategic focus.

If you are looking for an investor and a mentor, consider angel investors; however, pitch to venture capitalists if you only need money and freedom to run your business without mentorship.

5. Expected return

Of course, both investors expect some return for the money they have invested in your business. However, their expectations differ significantly, with venture capitalists expecting between 25% and 35% ROI, while angel investors look forward to between 205 and 25% return on investment.

You can project your expected returns based on past performance before deciding which source of capital to pitch to.

6. Due diligence

Conducting due diligence has sparked a lot of debate concerning angel investors in recent times. Some people have observed that some angel investors do not conduct due diligence before investing in a business venture because the money is theirs. The angel capital association argues that if investors spend at least 20 hours on due diligence before investing, they will significantly increase their chances for a positive return.

In contrast, venture capitalists conduct more than due diligence because they are bound by a fiduciary responsibility to protect investors’ money. Before settling for a company to invest in, venture capitalists can spend approximately $50,000 researching details about the prospects. They do not want to risk pooled money into uncertain ventures.

7. Different impacts

Venture capitalists may crush your company since they require that venture funds produce returns. To guarantee this return, venture capitalists dictate that at least one of their investments provides huge returns to cover any losses from failed startups or other bad investments.

They are likely to push you to take big risks, turning a startup into a unicorn. Their presence on the board of directors makes the pressure immense. The calculated risks may not be the ideal course of action for your customers and employees.

Angel investors are less aggressive in their demands and their impact on your organization. They can only offer advice when needed and do not form part of the board of directors. If you can handle extra pressure and need aggressive growth, you can pitch to venture capitalists; otherwise, persuade angel investors.

How to pitch for venture capitalists and angel investors

Preparation is key regardless of who you are pitching to invest in your business. Your pitch should be convincing. Ensure that what the angel investor or venture capitalists offers aligns with your business vision and goals.

Here are some things you need to help you pitch properly:

  • Business plan
  • Updated financial statements
  • Business financial projections
  • Market analysis
  • Marketing plans
  • The amount of money you want
  • The amount you have invested
  • How do you plan to use the invested money

The Bottom line

Venture capitalists and angel investors are viable sources of capital for your business, but you should know which one is viable for you. If you want to take an existing business to the next level and need a large sum of cash, you could pitch for venture capital. However, you should be ready for extra pressure to perform and produce returns.

If you launch a startup and need capital to stimulate your operations, you could pitch to angel investors for the capital.

Between venture capitalists and angel investors, which one do you prefer?