Angel investors and venture capitalists tend to operate in the same circles. While both invest in startup companies and new technologies, they're otherwise very different. An angel investor is generally an individual looking to invest their own money in a startup business. A venture capital firm is a group looking to invest its clients' money in new companies. This leads to stark differences in how these investors operate.
Consider working with a financial advisor if you're looking forinvestment adviceon where and how to invest your money.
Both angel investors and venture capital firms are best known as startup investors. This means that they tend to look for new companies that need money to get going.
It's an answer to one of the biggest problems in all of the business. Say you have an idea, along with the drive and talent to make it happen. You still need the (sometimes significant) amount of money it will take to open an office, hire a team, build the product and otherwise operate between Point A and Profitability.
This is where startup investors come in. You have a potential business, but need money to launch it. They have money and aren't necessarily interested in running a business. So they will invest, giving you money in exchange for an ownership stake in the business.
Startup investing tends to be an option for businesses with high ceilings, meaning that you're looking to achieve significant growth. In most cases, professional investors want to make their money through an IPO. They usually won't invest in a plumber or a corner store, even those can be quite lucrative. They're interested in businesses looking to scale up and go public. This isn't always the case, but it's standard.
Angel investors and venture capital are two of the most common forms of startup investors.
What Is An Angel Investor?
An angel investor is either an individual or a small group of individuals looking to invest their own money in a startup business. In exchange for their investment, angel investors typically receive equity in the company.
In most cases, an angel investor is a wealthy, professional investor. They qualify as an accredited investor, meaning that they can buy shares of private stock and they have a lot of experience building businesses. That said, occasionally retail investors can act as angel investors. If you know someone looking to launch a business and invest the money they need, then you have acted as an angel investor.
Angel investors tend to look for startups in the early stages of development and don't require as much proof of concept as venture capital firms tend to. Investing at this stage also makes it easier for angel investors to buy into a startup. Although angel investors tend to be rich, they're also still individuals. There's a limit to how much money they can provide, so earlier investments are better for them.
In general, angel investors tend not to take a big role in the running of a new business. This is not a hard and fast rule and in fact, many young businesses rely heavily on the advice of a more experienced investor. But in most cases, an angel investor provides funding and steps back.
What Is Venture Capital?Venture capital firms are investment groups. These are professionally managed and run businesses that invest with a combined pool of their own money and their clients' money. A venture capital firm will typically get money from institutional investors, professional investment firms and accredited individuals.
Like angel investors, venture capital firms typically invest in startup companies, providing funding in exchange for equity ownership. However, they tend to look for more established companies than angel investors do. While an angel investor may buy into a company on the strength of little more than an idea, a venture capital firm will generally want proof of concept and businesses that are already in operation. In this way, venture capital firms tend to be more methodical and risk-averse than angel investors.
A venture capital firm also tends to invest more money than an angel investor. They often buy more stakes in a startup company and invest at a stage when the company is worth more, so they pay more for their ownership. In exchange, however, venture capital firms tend to want a larger say in how the company runs. While angel investors often leave their investments alone, venture capital firms often want to be actively involved in the management.
Angel investors and venture capital firms tend to have very different profiles for startups. Young businesses that don't yet have much to show generally look for an angel investor. They don't need as much money, so a six-figure investment can get them off the ground and they may not be at a stage where the management and expectations of a VC firm can work.
On the other hand, more established startups tend to look for venture capital firms. If they have established a proof of concept and have even started regular operations, they can attract larger, more risk-averse investors. At the same time, the startup is at a stage where they need more money to keep operating. In fact, at this stage an angel investor may often sell their early stake in the company to a venture capital firm, cashing out and moving on while the VC firm takes the long-term view of waiting for an IPO.
The Bottom Line
Angel investors are wealthy individuals looking to invest in a startup company. Venture capital firms are investment firms that also invest in startup companies, but do so primarily using their clients' funds. Angel investors typically only invest in seed funding while venture capital firms may invest throughout a startup's lifecycle until they sell or go public. Both expect a return within a set number of years for the company to have an event that helps the investor get their money back.
Tips for Investing- You might not have access to startup investments, but you can still chase opportunities. Working with a financial advisor can help you identify and analyze potential investments to see how they might fit in your portfolio. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- Venture capital has funded some of the biggest parts of modern life, from Amazon and Uber to Netflix. Understanding what venture capital really is can help you better understand the market and how to think about investing in potential companies.
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