Angel Investment vs. Venture Capital: Which is Better for You?
Table of contents
If your startup company is an automobile, then capital is the car’s fuel.
Early-stage startups need capital to turn ideas into reality, whereas high-growth ones need the same to fulfill further ambitions. Either way, funding is the fuel of progress and growth.
Angel investments and venture capital are two major sources of equity finance that give external funding to startup companies. But how do they differ from each other? Read on to learn more.
- What is angel investing?
- What is venture capital?
- What are the similarities between angel investing and venture capital?
- How do angel investments and venture capital differ from each other?
- Angel investment vs. venture capital: Comparison table
- Non-dilutive alternative to angel investments and venture capital
What is angel investing?
An angel investor, also known as a business angel, is a high-net-worth individual who provides funding to early-stage business ventures or startup companies.
By investing in your business, the angel investor receives equity or convertible debt from your company.
What is venture capital?
Venture capital (“VC”) refers to a form of equity funding provided to startup companies that have demonstrated significant traction and growth potential.
VC funding usually comes from institutional investors, known as venture capital firms.
What are the similarities between angel investing and venture capital?
1. Money repayment is not required
An investment is different from a loan.
Angel investors and venture capitalists choose to bear certain risks when they decide to invest in your company.
In the case where your business does not go as well, it may be a relief for you to not have to repay anything. It is much less risky compared to taking out loans.
2. Equity dilution
Ownership stakes are a common condition for business angels and venture capital firms to invest in your startup. This dilutes your share of equity in the company, which really stings when your startup goes big (which ironically is your goal).
If you are worried about how you share ownership with investors, then equity, warrants and options are the terms that you should pay attention to in the term sheets.
3. Losing total control over your business
More often than not, VC funding comes with requests for board seats at your company. Business angels may want to become a director of your company, too.
In many instances, investor directors have steering power over major business decisions, sometimes pressuring your company to grow at a speed or in a direction that may not exactly align with the founders’ views.
4. Investment contracts have stringent terms
To protect the interests of investors, many investment contracts include provisions that give powerful rights to investor directors.
For instance, covenants commonly give investor directors the rights to:
- Change the size of the board of directors
- Make changes to voting rules
- Amend the articles of incorporation of your company
- Exchange, reclassify or cancel outstanding shares
Through inserting contractual provisions, obligations may also be imposed on your company to:
- Obtain a directors & officers (D&O) insurance policy
- Not enter into deals that may diminish the value of your investors’ shares
- Not to cause your investors to lose their liquidity priority
5. Serious outreach efforts needed
It takes a lot of effort to research areas of interest of different investors, cold-email them, prepare decks and pitch your idea. You may not find the right ‘angel’ or VC investor even with many tries.
Finding the right investor for your business is a time-consuming process, and certainly not a good thing for startups that need to act quick on the market.
How do angel investments and venture capital differ from each other?
1. Angel investors are independent individuals, VC firms are accountable to their own investors
Being independent investors, business angels’ investment decisions are based entirely on their personal evaluation.
On the other hand, venture capital firms pool funds from a group of investors in order to fund your business. These firms are therefore accountable to their own investors with the goals of maximizing and realizing their gains on investment.
2. Angel investments are available at an earlier stage
Unlike venture capitalists, many angel investors can and are willing to take more risks and invest in companies that do not have significant revenue yet.
Therefore, angel investments can help kick start your business and lead you to more funding options.
3. VC funding is generally larger in amount
With ample financial backing themselves, VC firms generally have higher investment capacities than business angels. VC funding can easily exceed millions of USD.
4. VC firms provide more structural support
In addition to monetary backing, venture capital firms usually give strategic support to their portfolio companies. These include hands-on management of your business, mentoring, consulting services, etc. to help your company grow.
Angel investors may also provide business advice and connections to help you (and their investment) grow. There is no guarantee of such support, though. Even if there is, it is likely less formal than that provided by institutional investors.
5. Raising VC funding gives you media exposure
Some startups have great products but nowhere to spread the news. Raising VC funding may help you get on the news, gaining brand exposure for your company.
Getting angel investments, on the other hand, is unlikely to get you the same PR perks.
6. VC funding is harder to get
The average pre-money valuation of series A startups is $18.5 million, and the figure has been on the rise.
While business angels may give even the earliest-stage startups a chance to prove their potential, VC firms look not just for a business idea.
To get a pay cheque from venture capitalists, you will need a proven revenue model, stellar track record and considerable growth potential.
Venture capital is therefore less readily accessible by companies without strong traction.
7. More pressure from VC investors
VC firms are keen on making huge returns on their investments.
Under the supervision and management of VC investors, your company may be pressurized to pursue breakneck month-on-month growth.
You may also be urged to undergo a liquidity event, such as merger, acquisition or initial public offering (IPO) at a time earlier than you want to.
Not everyone is comfortable with that kind of pressure, to say the least.
Angel investment vs. venture capital: Comparison table
The above section discusses differences between angel investment and venture capital in detail.
As a summary, below is a comparison table of angel investment vs. venture capital at a glance:
Non-dilutive alternative to angel investments and venture capital
Finding the right fuel to drive your company’s growth is no easy task.
For companies aiming for growth, raising funds from angel investors and venture capital could give you extra financial resources to deploy.
Yet, equity dilution and investor intervention are uneasy compromises that many entrepreneurs are unwilling to make.
Understanding the pain points of startup founders, Choco Up offers revenue-based financing, a non-dilutive funding solution that gives you growth capital.
Our funding model allows you to grow at your own pace and in your own way — we do not take board seats or impose covenants that interfere with your company’s management.
You can also keep your equity intact as we do not get any options or warrants from you.
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