Angel Investors and Venture capital Funding – Explained with Definitions

Introduction

All entrepreneurs are face with hard decisions in regards to finding start-up financing. The main sources are angel investors and venture capital firms. Knowing the major difference may help entrepreneurs to choose the most appropriate financing.

Angel Investors

Definition

“Angel investors are wealthy individuals who provide capital for start-up firms in exchange for ownership equity or convertible debt.” – Lerner et al

“An angel investor is a person who provides capital, in the form of debt or equity, from his own funds to a private business owned and operated by someone else who is neither a friend nor a family member.” – Sudek

“Angel investors are wealthy individuals who invest their own money in startup companies in exchange for equity ownership. They are focused on helping new companies get off the ground by providing seed funding before seeking venture capital.” – Prowse

These are wealthy investors who deploy their own funds in emerging companies. There is nothing to say that angels are rich since their annual salaries rarely exceed $200,000.

In India, an individual can become an angel investor without being rich. Individuals can come together to form an angel network and invest Rs 2-3 lakh.

Even so, they have available capital and love startups that offer better returns compared to the public market.

• Angels are high net-worth individuals who invest their own money in early stage startups

• Typical angel investment range is $25K to $1M. In India, the average angel investment for startups ranges from INR 20 lakhs to INR 2 crores

• Invest for higher returns than public markets

• Drawn to startups for passion and interest, not just financial returns.

Investment Size and Value-Add

In that case, Angels come to fill in the funding fail, but with smaller investments that most conventional Venture Capital firms would shy away to do.

On average, angel round starts at $25K to $100K and most angels have portfolios through sequential investments. Angel investors in India invest between INR 5 lakhs and INR 2 crores. This means that older angels can fund one startup to a tune of more than one million dollars.

Angels provide not only capital but mentoring, industry expertise, and valuable contacts as well. Startups have a great chance to attract angels for their self reasons.

They either feel passion towards the product they offer or have some knowledge of industry where the startup operates. For example, they join to have much more than return on investment.

Pros and Cons

One of the advantages of angels is their accessibility. Angel investors can be reached through angel investor networks or groups which are present in most cities and are good leads for any entrepreneur. Angels’ due diligence and funding decisions are often swifter, allowing startups to launch on a lump sum basis.

Pros

• Accessibility – networks exist in most cities to connect angels and entrepreneurs
• Quicker fundraising process compared to VCs
• Investment comes as lump sum rather than tranched
• Angels offer mentoring and advice also to capital
• More flexibility in deal terms and exit timeline

Cons

• Expect high returns, upwards of 25%
• Limited follow-on funding for more rounds
• May want decision-making involvement in the company
• More risk-involve than venture capital

But, angels do expect a high rate of returns for the risky investment, up to 25-30% within a period of 5 to 7 years.

They also have small capacity for secondary investments. In essence, investors must be willing to lose a part of equity in exchange for financing and direction by the angels who are usually hands-on.

Venture Capital

Definition

“We define venture capital as independently managed, dedicated pools of capital that focus on equity or equity-linked investments in privately held, high growth companies.” – Lerner et al

“Venture capital refers to investment in new, early-stage, high-potential startup companies that lack access to public equity markets or bank lending.”- Metrick & Yasuda

“Venture capital is a type of private equity focused on financing early stage, high-potential growth companies. Venture capitalists raise funds from institutions and wealthy individuals to invest in such startups in exchange for equity ownership.” – Gompers

Investments from venture capital firms is usually dedicated pools of capital that aim at financing of promising ventures and new ventures. Institutional and wealthy individuals act as limited partners to the venture fund and contribute the capital.

The venture capital partners invest the funds in companies in return for equity. Board members serve as advisors and guardians to the startups and they help to increase growth and financial returns. Venture capitalists are normally experienced as entrepreneurs or industry executives.

Investment Size and Involvement

Angels invest smaller amounts typically between $500K to $5 million which is the initial amount. It is also possible that angels participate in the company’s growth by undertaking multiple rounds that venture capitalists take part in.

These are their connections to future investors, partners, and acquirers. Similarly, the VC brand functions as a seal of approval that provides legitimacy to the startup.

However, the venture capital comes with the stipulations, given their fiduciary responsibility to generate high returns for limited partners.

The investors expect annual returns of about 25 to 30 percent per annum, and the lifetime of a fund is more than 10 years. The due diligence is very stringent, and the deal process can last 6 months or even more.

Venture capitalists invest significant equity holdings of 30% or more in their initial round. Such provisions are meant to protect their investments in case growth stalls.

Delay in progress leads to conflict by way of firing the management or changing the management course.

Angle Investor VS Venture Capital

Is Angel or VC Funding Right for Your Startup?

For entrepreneurs, the ideal funding source depends on your stage, vision, and ability to align expectations. Angels allow more control and flexibility, while VCs help rapid growth.

Talk to prior entrepreneurs, investors, and advisors to determine the best fundraising strategy.

With realistic plans and compelling execution, your startup can thrive. Understanding how angel and venture capital works enables you to pursue the financing that matches your needs and values as the founder.

Conclusion

For entrepreneurs, the ideal funding source depends on your stage, vision, and ability to align expectations. Angels allow more control and flexibility, while VCs help rapid growth.

Talk to prior entrepreneurs, investors, and advisors to determine the best fundraising strategy.

With realistic plans and compelling execution, your startup can thrive. Understanding how angel and venture capital works help you to pursue the financing that matches your needs and values as the founder.