Venture Capitalist vs. Angel Investor: 4 Areas of Difference

Venture capitalists (also called VCs or VC firms) invest in young companies that have a high growth potential and return on investment. VCs take a high risk—with a potential of a very high reward—when they provide cash flow, liquidity, and other types of funding to startup companies. Some venture capitalists work on their own, but often, they work as limited partners—you can think of venture captial as a more tight-knit form of crowdfunding.

Unlike other types of money lenders or institutional investors, VCs have an aggressive, risky style of investment and overall strategy. This means they might end up backing companies that have a higher likelihood of failure—something a traditional equity investor would aim to avoid. The goal of a VC is to balance out their portfolio companies so a few giant successes compensate for the many losses along the way.

An angel investor is typically one person who provides capital and crowdfunding in early-stage business startups or small businesses in exchange for equity in the company. Sometimes referred to as accredited investors, angel investors are high-net-worth individuals. However, the Securities and Exchange Commissions reserves the label of “accredited investor” to those who have a net worth of one million dollars or more in assets.

Nonestablished businesses with insufficient cash flow commonly utilize angel investing, which can provide much-needed cash infusions to help them down the path toward profitability.

Both angel investors and venture capital firms can provide your business capital when you need it. Business loans from these types of investors often give your new business or startup business a boost to keep running. Entrepreneurs and small business owners should be aware of the key differences between the two before accepting an offer:

1. 1. Amounts of funding: Angel investors generally invest in the tens of thousands of dollars, while a venture capital firm might invest more than a million dollars and then even more in subsequent rounds of funding.
2. 2. Early-stage versus late-stage funding: Angel investors generally provide capital for burgeoning ventures, so they might be the right choice if you’re looking for early-stage funding for your business. On the other hand, venture capitalists invest in the later stages once they see the business plan working and can see the growth trajectory of the company.
3. 3. Groups versus individual investors: An angel investor is often a single person or a wealthy individual who is willing to invest their own money in your company and may even want to help you run the company. Venture capitalist firms are generally groups of investors who have pooled their money to invest in various companies, and you may find these firms less interested in the day-to-day of your business.
4. 4. Power to remove the founder: When you accept money from either an angel investor or a venture capitalist firm, you will most likely be giving over equity stake in the company. If the business performs poorly, it’s possible that a venture capital firm will use their majority equity to remove you as the founder to try and save the business if the board of directors believe your decision-making isn’t working. An angel investor will typically not have a majority stake in the company and so the risk of losing ownership could be somewhat lower.

To build a successful startup, you must first find a problem to solve and learn how to counter the competition. Sign up for a MasterClass Annual Membership to discover Alexis Ohanian’s approach to thinking creatively, being resourceful, finding funding, and nailing your execution.