In this video of the Startup 101 series, we explain who is an angel investor, who is a venture capitalist and outline the difference between an angel investor and a venture capitalist.

You will also learn how both the investment approaches are different and what these investors are looking for in a startup before making an investment.

Who is an angel investor and a Venture Capitalist?

Basically, an angel investor is anyone who uses his own money to invest in startups, while a venture capitalist (VC) is someone who uses other people’s money to make investments in startups.

What is the difference between an Angel Investor and a Venture Capitalist?

Angel Investor: These generally include former or current entrepreneurs or big businessmen, who have large sums of money available for investment. Anyone who has enough money coming from different sources, be it income or business can become an angel investor.

VC: VCs usually form an entity like a VC Fund which raises funds from big family offices, corporates or different funds like pension funds. These VCs then pool all the money they have raised and it can now be used to invest in a lot more startups that can be invested by a single angel investor.

Angel Investor: Angel investors usually invest at a very early stage of the startup right at inception or the idea stage. As the angel investors come into the picture at such an early stage when the idea of the startup is not even tested, they are taking a lot of risks and they usually end up with much more equity compared to anyone coming in at later stages of the startup. Due to a larger stake in the early stage, angel investors generally make a huge profit when a startup succeeds and have a higher return on their investment.

VCs: Unlike angel investors, VCs take a far lesser risk as they usually invest in a startup in their growth or expansion stage. It means that a startup has a proven business model and is already generating revenues. But due to a smaller stake in the company, VCs usually have a smaller return on investment compared to the angel investors.

Angel Investor: Since the risk is high, angel investors are looking to make a quick buck and they generally end up selling their stake as soon as the valuation of the startup is increased and they get a good return on their investment. Considering that angel investors don’t have any plans for long term involvement with the startup, they are not much involved in the day to day operations of the company. Which is why they don’t ask to be a part of the company’s board.

VCs: However, since the VCs enter the startup during its growth phase, they are more interested in helping the company grow and expand as quickly as possible. They not only put in the money but also support the founders and the team by providing them with their expertise and access to their networks so that they can grow in size and then they again help them raise more funds from other VCs as well. In a lot of the cases, these VCs stick with the company for longer durations like until the IPO or an acquisition. This means that the goal of the startup and the VCs are generally aligned and both are interested in the growth of the startup rather than making a quick buck. This is the reason that VCs have a more hands-on approach and often demand to be a part of the company’s board and remain actively involved in the day to day operations of the company.

Music: Infraction - Corporate Business Music https://youtu.be/wGqBrJMB-Zs

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