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Venture Capitalist vs. Angel Investor

How to Decide Between Pitching to a Venture Capitalist vs. Angel Investor

Getting funding for your business is no walk in the park, especially if you’re just starting up. But in order to keep your business dream alive, you need capital.

Depending on what stage your business is in, you might seek funding from a venture capitalist (VC) or angel investor. Learn the difference between venture capitalist vs. angel investor to decide which to pursue.

Venture capitalist vs. angel investor

Both venture capitalists and angel investors are people who invest money into businesses. Angel investors and VCs both take calculated risks when investing in the hopes of earning a healthy return on investment (ROI).

So, what is the difference between angel investors and venture capitalists? Being able to answer this question can save you time and help you seek funding from the best fit.

Learn about key differences between angel investors and venture capitalists below.

Venture Capitalist vs. Angel Investor

How they work

One difference between venture capitalists and angel investors is what money they use to invest.

A venture capitalist is a person or firm that invests in small companies, generally using money pooled from investment companies, large corporations, and pension funds. Typically, VCs do not use their own money to invest in companies.

An angel investor is an accredited investor who uses their own money to invest in small businesses. They are required to have a minimum net worth of $1 million and an annual income of at least $200,000 to be considered an accredited investor. Many angel investors are small business owners’ family and friends.

Small business angel investors focus more on helping build someone’s business than profiting right away. As a result, their terms might be more reasonable than a venture capitalist’s terms.

When they invest

Angel investors and venture capitalists invest in businesses at different stages. The investor you appeal to depends on whether you are established or if you are just starting up.

Venture capitalists tend to invest in businesses that are already established to reduce their risk of losing investments.

Angel investors are more likely to invest in businesses that are just starting out. They choose businesses that they are interested in and can see becoming profitable, even if the company has not proven itself yet. Because of this, angel investors take more risks than venture capitalists.

If you are just starting out, an angel investor might provide you with enough money to get off the ground. When you’re established and looking to expand, you might try pitching to a venture capitalist.

Investment amounts

Another difference between angel investor and venture capitalist is the amount of business capital both investors are willing to offer.

VCs invest more money into businesses than angel investors. According to the Small Business Administration, the average venture capital deal is $11.7 million.

The average angel investment is $330,000 according to the SBA. While venture capital tends to be invested in the millions, angel investments are in the thousands.

Return expectation

The return on investment venture capitalists and angel investors want differs. Generally, venture capitalists expect a higher percentage.

Venture capitalists might expect a return on investment anywhere between 25% and 35%.

Angel investors may want a return between 20% and 25%.

An investor’s role in the business

After the investor invests in your small business, what do they want?

Both venture capitalists and angel investors want business equity and/or some sort of control in how your business runs. Because they invested money into it, they want to make sure they get a high return on investment out of it.

Venture capitalists might require that you establish a Board of Directors and give them a seat on it after investing. Generally, they are not interested in acting as mentors, although this varies from firm to firm.

Many angel investors act as mentors. They might offer suggestions about running your business, help you form connections with lawyers, accountants, and banks, and help with decision-making.

What are you looking for in an investor? Are you looking for someone who acts as a partner and mentor, like angel investors? Or, would you prefer if the investor didn’t act as a mentor, like VCs?

How to pitch to investors

Whether you want venture capitalists or angel investors to invest in your small business, you need to be prepared. You will need to perfect your investment pitch.

Before you pitch to venture capitalists or angel investors, research them to find ones that align most with your business.

During your pitch, show investors your business plan, financial statements, financial projections, marketing plans, and market analysis.

You will also need to detail how much capital you are seeking, how much money is already invested in your business, and how you plan on using the money.

Be prepared for investor meetings with Patriot’s online accounting software. Create financial statements and use data to project future finances. The software is easy-to-use, and we offer free, U.S.-based support. Get your free trial today!

This is not intended as legal advice; for more information, please click here.

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