What does it mean to receive venture capital versus an angel investment? Entrepreneurs new to these financial terms sometimes get these two types of funding mixed up. Both provide small businesses with much-needed capital, but the difference is in which types of startups they financially back and how much goes in each investment.
Here’s what you need to know about the difference to ensure you’re receiving the right funding for your startup.
What Is Venture Capital?
Venture capital (VC) is a type of financing that is invested by an individual or group into early-stage startups that have high risk and high potential.
VC funds in the United States totaled a record $128.3 billion in 2021, up 47.5% over 2020, according to statistics in JD Supra. The year-to-year average jumped from $156.9 million to $188.1 million.
Take a look at these key words: high risk. Why would one invest a significant amount of capital into a startup if they knew they were at risk for failure? The answer is in those same words. Venture capital invested into a startup, particularly an early-stage startup, has the potential to yield a huge return on investment. In turn, the investment offsets risk and allows venture capitalists greater potential to receive more control over the startup and its decisions.
What about startups no longer in an early stage? Depending on their growth potential, developed companies also may be considered by venture capitalists and VC firms.
How Do I Get Venture Capital?
Much of whether a startup would be a recipient of venture capital depends on what the business does and its offerings. Funding from a venture capital firm or venture capitalist is often invested in businesses that have novel components. This includes, but is not limited to, technology or a business model in growing tech industries, biotech, IT or software.
Other factors that are appealing for venture capital include the aforementioned high potential, a wide market and a competitive advantage. Venture capitalists and VC firms also work hard to find and invest in privately held startups that are valued at over $1 billion — otherwise known as unicorns.
If you find that your business does not match this criteria, there is not much of a chance it may receive venture capital. However, startups that are novel or at unicorn status may begin pitching venture capitalists for funding.
Venture capital does not need to be repaid since it is not considered to be a loan. However, the startup must provide investors with an ownership stake before receiving funding. Usually, this is in the form of shares.
A startup that is ripe for a venture capital investment will often receive an investment after its seed funding round. Shares will then begin to increase in price, if the startup does well, and the venture capitalists or VC firm will sell their shares once a larger company comes in and offers to buy the startup.
Getting venture capital requires careful planning and preparation on behalf of the startup. A startup needs to come prepared to a pitch meeting with a business plan, a pitch deck with a four-year projection of the startup’s income and expenses and answers to any and all anticipated questions the venture capitalist or firm may ask as part of due diligence.
What Is an Angel Investment?
An angel investment is money invested into a startup by an individual investor. An angel investment is also significantly less than what a venture capital firm can invest into a startup.
An angel investor is defined as a wealthy private investor. They hail from a wide variety of industries and many have previously held former leadership roles. A helpful resource for finding and connecting with angels is the Angel Capital Association (ACA).
The amount of capital invested may range from $25,000 to over $100,000. The average angel investment in 2020 was $392,025, an increase of 4.8% from 2019, according to the University of New Hampshire.
However, unlike VC firms or venture capitalists, angel investors are not equipped to invest millions into startups.
How Do I Get an Angel Investment?
If an angel investor expresses interest in investing in your business, the investor also will need an ownership stake, just like a VC. This stake may be shares of the business or an equity position. However, angel investors are generally more laid back in how they work with the business after financing it. They conduct much less due diligence and may be involved, or not, with the startup, per the owner’s wishes.
Which Funding Is Best for My Business?
Ultimately, the decision of whether your startup will explore venture capital or angel investment as part of its funding will depend on how novel the business is, its startup stage, risk potential and the amount of capital needed.
If you find neither type of funding is best for your business, consider meeting with a financial advisor to discuss other financing options available to you and your startup. Similarly, if you find one type of funding may be a match, it’s wise to meet with a financial advisor and discuss whether you should pursue obtaining capital from this resource.
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