Difference Between a Venture Capitalist and an Angel Investor

ByNikolina Cveticanin
June 14,2022

Startup funding tips: Venture capitalists vs. angel investors

In this article, we discuss the concepts of angel investing and venture capital, their differences, and the pros and cons to help you identify the best fit for your startup.

Every day, entrepreneurs across the world come up with ideas that might turn out to be multi-million dollar businesses. Regrettably, those lightbulb moments quickly fade if there’s no financing available to see them through. Ideas keep vanishing because there’s no capital to bring them to life.

Fortunately, there is a way to navigate this issue. Our discussion of venture capitalist vs. angel investor will allow you to regard the above scenario in a positive light. We’ll compare angel investing and venture capital, learn their differences, and weigh the pros and cons that should help you choose the right one for your business or startup.

What Is an Angel Investor?

An angel investor is typically an individual or group of individuals with high net worths (surpassing $1 million) who invest in small or growing businesses. Angel investors usually invest during the early stages of a business, either before operations commence or right after. With angel investing, small businesses get a chance to secure seed funding. In return, angel investors can get convertible debt or equity in the business, become part owners and/or shareholders.

The Securities Exchange Commission requires that angel investors be accredited. Accreditation is important to ensure that the investor or group of investors are financially sophisticated. They should also be able to fend for themselves, especially in the event of a loss. In our comparison of angel investors and venture capitalists, we will see that this is one of the most salient points, as it protects investors. 

To earn such accreditation, investors must meet either of the following two criteria:

  • Earned an annual income of $200,000 for two years before the accreditation and has a high chance of retaining such earnings in the future. Where taxes are filed with a spouse or spousal equivalent, the income is pegged at $300,000 annually (a monthly income of $16,667 and $25,000, respectively). 
  • A net worth of over $1 million.

What is a Venture Capitalist?

To engage in a venture capitalist vs. angel investor conversation, first, we need to look at the definition of a venture capitalist. Namely, a venture capitalist is an individual or corporate entity that invests in small and growing businesses with funds pooled from investment companies, banks, pension funds, and other sources. This means the money invested doesn’t necessarily belong to the venture capitalist. Investors in this category will also not invest at the early stages of the business but when they see potential or actual growth. 

Investments by venture capitalists are considered high risk, but the potential for growth shown by the small business can easily offset the risk of a bad investment. 

Difference Between Venture Capital and Angel Investing

Venture capital and angel investing have similarities in that they focus on small and growing businesses. There is also their preference for technology and science sectors because they tend to show considerable growth and provide more investment security. Moreover, both kinds of investment can earn a reasonable stake in the business, and options for conversion of debt to equity can be made available.

Regardless of these similarities, there are also notable differences that set them apart. This is why a comparison of angel investors and venture capitalists is indispensable before a business decision can be reached. Below are some aspects where their differences shine through.

Amount of Funding Available

An angel investor will typically invest hundreds of thousands of dollars because they are investing their own money. Venture capitalists, on the other hand, will invest millions of dollars because they have more access to a range of funds. 

Types of Investors

As already stated, angel investors are wealthy individuals or groups of individuals with high net worths. Meanwhile, venture capitalists take on high-risk investments with funding from third parties.

Time of Investment

Angel investing is usually done at a more vulnerable point of the business, which is a higher risk. Businesses that have angel investors are generally in their early stages, before or right after operations commence. Conversely, venture capitalists prefer to invest in more established businesses that have higher chances of providing tangible returns. To be fair, this is not out of place, considering that the funds belong to third parties.

Level of Involvement

Regardless of the type of investor, there’s a desire to become involved in the activities of the business they invested in. The aim for both venture capitalists and angel investors is to have a firsthand idea of how their investment is being managed and the steps being taken to ensure their returns. Angel investors tend to become part owners and get involved in the day-to-day operations of the business. But, in some cases, they are satisfied with only providing financial support. Venture capitalists, on the flip side, prefer to get involved in the decision-making by being on the board of directors.

Due Diligence

Due diligence is one of the most important segments of any investment process for angel investors or venture capitalists. Angel investors will usually conduct basic due diligence checks because they own the investment sum and won’t be held accountable by third parties. 

Venture capitalists are more prone to lawsuits in the event of reckless investments because of the fiduciary responsibility to their clients and other third-party institutions. For this reason, they are liberal with the resources that go into due diligence, preferring to ascertain in the preliminary stages that the investment doesn’t pose any risk.

Industries of Interest

As a rule of thumb, an angel investor will invest in an industry they are familiar with. This is either because they have made money in that industry, or understand the workings. Venture capitalists are more interested in industries they consider profitable.

Angel Investor Pros and Cons

Angel Investor Pros

  1. Angel investors are more willing to take risks with their own money by investing in businesses that have just launched operations or are about to do so.
  2. In most cases, angels only require a return on their investment at a future date of the anticipated growth of the business. This is more convenient than debt financing with a set payback date.
  3. Mentorship opportunities may present themselves because angel investors are familiar with the industry they have invested in. As startups need all the guidance they can get, especially when navigating challenges, angel mentorship is valuable.
  4. With angel investing, there is flexibility to convert the investment sum into equity in the business. This saves the business owner from having to repay bank loans when the business is going through a rough patch.

Angel Investor Cons

  1. Since angels invest their own money, their funds may be insufficient. The consequence is that a business owner will need to bring several angel investors on board and potentially deal with a slower funding process.
  2. Some angel investors may become difficult to work with when they insist on having a say in your business without having some level of ownership.

Venture Capitalist Pros and Cons

Venture Capitalist Pros

  1. Venture capitalists can and will most likely leverage their connections and experience in the industry to market and promote your business. This is a win-win situation for both parties involved.
  2. Just like angel investors, they may grow your company by sharing their industry knowledge and referring professionals to work for.
  3. Venture capitalists can also convert their investment sum to equity in your business and eliminate the need to pay back funds at a set time.
  4. They can provide more substantial amounts of money your business needs to grow.

Venture Capitalist Cons

  1. As is the case with angel investing, venture capitalists tend to have a say in your business due to the significant investment they’ve made. Expectations may get too high and can only be remedied through a balanced decision-making process.
  2. The likelihood of a buyout by venture capitalists is high. This may only be beneficial when you need the funds for a new business venture.

The Role of Private Equity

After the above comparison of angel investor and venture capitalist, a quick definition of private equity is important to address grey areas and possible similarities.

Private Equity Definition

Private equity refers to funds that are mainly interested in acquiring private companies not yet listed on the stock exchange. Private equity funds usually have high-net-worth or accredited individuals and firms coming together to pool capital towards investment. Entry into these funds is exclusive due to the large sums required. For example, the minimum entry requirement for some funds is $250,000. Once the required capital is raised, the fund is closed.

Angel vs. Private Equity

The key similarity between angel investors and private equity is that they have the same goal of investing in a business to get returns. They may do so because they believe in the potential the business possesses, wish to gain control of it, or to save it from failing. 

On the other hand, the major difference between the two types of investors is that the angel is an individual who invests on a smaller scale, while a private equity investor usually does so on a larger scale. The intention of a private equity investor is also geared toward acquiring the entity to be invested in.

Venture Capitalist vs. Private Equity

The objective that both venture capitalist and private equity have is the same - to get returns. Private equity investors, however, are more interested in larger enterprises and companies that are well established. As discussed in this article, venture capitalists are open to investing in startups and businesses that show growth potential.

Moreover, venture capitalists are known to narrow their investment scope to tech and science-inclined companies, but this is not the case with private equity investors who prefer diverse portfolios. The sizes of their investments also differ, with private equity investments being higher.

Final Thoughts 

Regardless of your preferred capital raising strategy, if you’re a business or startup owner, you should explore the benefits provided by venture capitalists vs. angel investors. Even though both classes of investors can help you grow your business, you need to weigh the pros and cons to determine which one is optimal for your company. The amount of capital required is also an important factor to be considered because the investment scopes of these classes differ.

No matter the class of investor you need to approach, be sure to conduct due diligence and prepare an impactful business plan that will increase your chances of securing the investment you need.

FAQ
Should I pitch to angel investors or venture capitalists?

Pitching to either angel investors or venture capitalists depends on the stage of the business, the amount of capital required, and the industry in question. The specific needs of your business should be considered in order to make the final decision.

Do venture capitalists invest their own money?

Venture capitalists are usually employees of venture capitalist companies who pool funds from individuals, banks, or pension funds to invest in businesses. While, in most cases, venture capitalists invest third parties’ money, they may invest their own funds under a general partners’ agreement. A general partner in a venture capitalist company is part of the group of investment decision-makers.

How do angel investors and venture capitalists work?

An important part of opting for a venture capitalist vs. an angel investor is learning how they both work. Angel investors are individuals or groups with high net worths, investing their own money in businesses and startups.

Venture capitalists are employees of venture capitalist companies that invest money belonging to third parties, such as banks and pension funds, in businesses.



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Virtual assistants provide administrative, technical, or creative services to clients from their home offices. For this role, you’ll need excellent organizational skills and a willingness to dedicate time and effort to finding the right clients. You will also have to compete with some established virtual assistant companies, but if you focus on smaller businesses and entrepreneurs, you’ll be able to make more than a decent living with this option. Offer Event or Wedding Planning and Organization When it comes to profitable eCommerce business ideas, providing wedding and event organization is another service you can promote and book online. Not everyone has the time or creativity to organize everything for their big day, company outing, or kids’ party.  This is where your eCommerce site comes into play. You can offer services online and allow your customers to book through your eCommerce store.  For this to be successful, you'll need to create a large network of vendors, caterers, and other third parties. However, if you already have such service providers standing by, this business could be the right idea.  No Clients Needed If you are an introvert and prefer not to deal with clients or customers, you can still make money online. There are excellent online eCommerce business ideas you could pursue, so let's discuss those as well. Start With Affiliate Marketing Affiliate marketing is a type of online marketing where you promote other people's products and earn a commission on any sales that you generate. This can be a great way to make money online if you're able to drive traffic to your affiliate links. Just be sure to choose products that are relevant to your niche and audience. So, where do you start with affiliate marketing now that you’ve chosen it among other ideas for an eCommerce business on our list? You could create a blog, social media account, or YouTube channel where you review products from an array of brands. Having a niche market, you can tap into through your blog or account can be a great way to earn affiliate commissions, as well as build up your own brand and authority. You'll need to invest some time and effort into creating high-quality content, but if you can build up a large following, you'll be able to make a great living reviewing products online. Launch a Dropshipping Business Another excellent choice that belongs to the easy eCommerce business ideas category is launching a dropshipping business. When you dropship, you simply sell products sourced and fulfilled by a supplier. This can be a great way to get started in eCommerce with little or no investment. You just need to find a reputable supplier and set up your eCommerce store. Once you've got everything up and running, it's just a matter of driving traffic to your site and making sales. You'll also be responsible for customer service and ensuring that your shoppers are having the best experience. After all, 91% of customers will simply leave and never return if they have a bad experience with your store, which is something new businesses cannot afford. Bottom Line There are plenty of ideas for an eCommerce business that involve selling products or services. So, if you're looking to get started in eCommerce, be sure to choose the option that best suits your skills and interests. Moreover, take a closer look at the professional network that you’ve built up over the years and then decide which avenue to pursue. With commitment and effort, you can start making money online in no time!
By Vladana Donevski · June 23,2022
The documents for incorporation differ by state, and the nature and type of the business looking to incorporate. In the United States, Corporations and Limited Liability Companies (LLCs) are the two main types of business entities, and require different documents to achieve that. In this article, we will learn the differences between articles of incorporation and organization, their components, the filing process, and why they’re necessary. Let’s get right into it! Articles of Incorporation: Definition The articles of incorporation - also known as a corporate charter, articles of association, or a certificate of incorporation - are legal documents filed to establish a company of a specific type as a business entity. In other words, they give the corporation its legal identity. In practical terms, for a corporation to open a bank account, issue stock or shares, operate within a state, and engage investors, it must first file articles of incorporation. In the United States, this is usually done with the Secretary of State or company registrar, depending on the state of incorporation. Delaware and Nevada are the most popular states for registering your corporation, because of their friendly regulations and minimal tax requirements. Articles of Incorporation vs. Organization Most people tend to confuse articles of incorporation with articles of organization, but they are not the same; now that we’ve defined the former, we’ll do the same for the latter. The articles of organization are filed at the point of creating an LLC. In terms of function and components, they are no different from articles of incorporation. However, the regulatory requirements are different and might be stricter, depending on the state and industry the business is in. These are the primary thing to research for prospective owners learning how to incorporate their business. The next step is filing your articles, so it’s time to learn how it works. Filing Articles of Incorporation The Required Documents The components of documents to be provided upon filing articles of incorporation vary by state, but many of them are the same everywhere. Most of these components will be on the face of the certificate of incorporation, and they include: The corporation’s name and address The name and address of the registered agent responsible for accepting legal documents on behalf of the corporation; some states may require a formal agreement of the agent’s acceptance of this responsibility. The number and type of authorized shares; more details on this can be found in the articles of incorporation and their bylaws. The type of corporate structure (e.g., profit, nonprofit, etc.) The names and addresses of the founding board members The names, signatures, and addresses of the persons handling incorporation; a corporation can have multiple incorporators who do not need to be directors or stockholders. If applicable, the lifespan of the corporation, as some corporations are made to exist for a limited time and carry out a particular function. The number and type of stocks the corporation can issue. Other components which are not required, but can be included, are: The limitation of directors’ liability Stockholder actions The assignment of authority to call stockholder meetings The purpose of incorporation, which may not need to be specific, depending on the state. The Filing Process The end goal of filing is to receive a certificate of incorporation. After preparing the documents, the incorporator should schedule an appointment with the designated filing agency of their state. Procedures differ between states, but generally begin with paying a filing fee after submitting the required paperwork. The process is completed upon acceptance of the paperwork and approval of the corporation’s registration. In most states, corporations must have both articles of incorporation and bylaws, even though bylaws are not to be filed. Bylaws only serve as internal documents setting out the rights and responsibilities of a corporation’s shareholders, directors, and other officials. Benefits of Incorporation Corporate Brand Identity Customers are more inclined to trust and do business with a brand when its corporate identity is established, as are investors. Banks are more likely to finance your venture if it’s an official business, and you’ll certainly look better in the strict due diligence checks on your business. Where no official or formal records are found, chances are that funding will disappear for lack of confidence in the safety of investing in you. Tax Advantages A corporation’s tax liability can be reduced depending on the state of incorporation. This tax reduction is often justified through operational costs like insurance, green energy investments, employee retirement benefits, production costs, employee wages, etc. Separation of Liability Filing your articles of incorporation separates the corporation's liabilities from those of its owners, in events of criminal activity, injury, or loss. The owners’ personal assets cannot be seized, auctioned, or sold if the business goes into debt. On the other hand, owners of unincorporated businesses are at risk of losing personal property in such situations. Protection of the Business Name Before an applicant is accepted, the state of incorporation will conduct a search to ensure that no other existing business or corporation has the same name. Applications for companies with an already taken business name won’t go through, because those names are protected - but only if their owners incorporated in time. Business owners also have the right to seek legal consequences for infringement of this protection. Perpetual Existence For businesses with no preset lifespan, the articles of incorporation guarantee longevity and perpetuated existence. This means that, in the event of withdrawal or death of one or all owners, the business remains in existence. By extension, a transfer of ownership is an option for incorporated entities. Unincorporated entities suffer a different fate and cease to exist in such situations.
By Vladana Donevski · June 30,2022

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