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Angel investors and venture capitalists provide early-stage and high-growth potential small businesses with funding. These two groups, while similar in what they do, have key differences entrepreneurs should consider when going about acquiring capital. Angel investors often provide smaller funding amounts and might have less business acumen compared to larger venture capitalist groups. Startup companies should carefully consider all their financing choices so that their business has the money it needs to flourish.
What Is a Venture Capitalist?
A venture capitalist (VC) is a group of individuals that seed developed businesses with capital to grow. Startups have manysmall business loan options available, but sometimes working with a VC is a viable choice. Venture capitalists take an equity stake in the company and get their hands dirty with respect to how the business is run. VCs pool money from companies and investment funds and can provide large funding amounts to a growing enterprise.
How Venture Capital Works
Venture capital works by investing money into high-risk small businesses within a process-based framework, often after the angel investing stage. There is tremendous upside potential in the eyes of VCs who look to improve the startup’s operations, but with that possibility of a large return on investment comes major downside risk. Venture capitalists have an exit strategy in mind once they have injected funds and impacted a target company. They might buy the firm altogether or seek a potentially lucrative initial public offering (IPO).
Pros and Cons of Venture Capital
There are many advantages and disadvantages that come with venture capital funding. For one, a small business owner who seeks a large investment should pursue a venture capitalist rather than an angel investor. VCs can make bigger investments, typically. A downside, though, is that venture capital then takes a significant equity stake in your company and you lose some control. Still, that reduces the risk for an entrepreneur. Moreover, you have access to VCs’ market knowledge and networking connections.
What Is an Angel Investor?
Angel investors are often accredited investors who put up their own money to help launch a new enterprise. An accredited investor is someone with at least $200,000 in annual income and a net worth of at least $1 million. Angel investing is different from venture capital in that the former might be a friend or family member, not a consortium of wealthy business experts.
How Angel Investors Work
Angel investors put up their own money to help early-stage small businesses grow. In exchange, they receive a significant equity stake in the startup. These accredited investors are often individuals, but angel investing can also be done among a small group of wealthy people. Angel investing and venture capital are done at contrasting times, with angel investors usually aiming at firms that are just getting going.
Pros and Cons of Angel Investors
Angel investors vs venture capitalists have their pros and cons. Angel investors take on more risk than VCs and banks issuing loans since it is their money at stake and the target firm is in its infancy. A small business owner assumes less risk, as a result – if the new business goes bankrupt, the angel investor shares in the losses. Another upshot is that angel investors might be knowledgeable about business matters, which the small business owner can benefit from. A downside, though, is that you as the owner give up control since angel investors take big stakes in companies. Recommended: 9 Tips for Running a Successful Small Business
Venture Capitalists vs Angel Investors
There are many key similarities and differences between a venture capitalist and an angel investor. It’s important for small business owners to know the similarities and differences of each before making a decision.
Similarities Between Angel Investors and Venture Capitalists
Angel investors and venture capitalists are alike in that they target fast-growing startups, with tech and science companies being sought out by both. A venture capitalist and angel investor will both perform their due diligence, though VCs often do more to closely understand the firms in which they invest. Both the two investor types might take an equity stake in your business.
Differences Between Angel Investors and Venture Capitalists
Among the differences between a venture capitalist versus an angel investor is the amount typically invested, with venture capitalists typically investing larger amounts. Another difference is angel investing is typically done earlier in the life of a business, whereasVC funding funds more established, though still emerging, firms. And finally, the due diligence might be less intensive with an angel investor as opposed to a venture capitalist. VCs are usually experts on how a business should operate, in contrast to angel investors who may be there just to provide financial help.
Alternatives to Venture Capital and Angel Investors
Small business owners have other means to acquire capital to grow a startup outside of angel investors and venture capitalists.
Small Business Loans
Capital can be acquired byapplying for a small business loan. A small business loan can help foot upfront costs to help expand your business without giving up equity.
Crowdfunding
Another option iscrowdfunding. This new way of raising capital provides an energy boost to a growing or even established company. You must create a campaign that aims to raise money from any of a variety of potential investor types. The biggest advantage of crowdfunding is the funds do not need to be paid back.
Merchant Cash Advances
Amerchant cash advance is a way to acquire quick capital to build out your business. While they are not loans, merchant cash advances provide liquidity. They work by merchant cash advance companies buying future sales at a discount. For repayment, they might take a percentage of future deposits or withdraw funds directly from the business on a fixed schedule.
Compare Small Business Loan Rates Today
Startups have many options when it comes to raising money to grow their companies, including angel investors and venture capitalists. While there are key differences between the two, both provide cash infusions to high-growth potential firms, often in exchange for equity or future profits.If you’re wanting to grow your business with a small business loan, consider Lantern by SoFi. With Lantern, you can receive a small business loan offer from one of our leading lenders by filling out one simple form, all with no obligation to you.
Frequently Asked Questions
What is the difference between an angel investor and a venture capitalist?
Is it better to pitch to an angel investor or venture capitalist?
What are the advantages of working with an angel investor?
What are the advantages of working with a venture capitalist?
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About the Author
Mike Zaccardi
Mike Zaccardi, CFA, CMT, is a finance expert and writer specializing in investments, markets, personal finance, and retirement planning. He enjoys putting a narrative to complex financial data and concepts; analyzing stock market sectors, ETFs, economic data, and broad market conditions; and producing snackable content for various audiences.
