Angel investors are wealthy individuals who can provide financial support for the establishment of new businesses and startups. Angel investors frequently take an ownership stake in a particular startup. Angel investors will make a significant monetary contribution to help a startup begin business operations. The amount that these investors contribute will vary depending on the startup’s needs and the industry to which the startup belongs. In several cases, angel investors are the investors of choice of startups that fail to meet the criteria for bank financing and are unable to interest a venture capital (VC) firm.
Differences Between Angel Investors and Venture Capitalists
There are two major groups into which all investors can be classified. The first group is that of angel investors; the second, venture capitalists. Angel investors and venture capitalists are people who invest their money into new businesses. Both take planned risks when they invest their money; when they do so, they hope to earn a significant return on investment. There are several important points which differentiate angel investors and venture capitalists.
Angel investors are authorized investors who use their own wealth to invest in small businesses. This should not come as a surprise when one considers the fact that a great many angel investors also happen to be owners of small businesses. Angel investors who are owners of small businesses tend to focus on investments that build a business instead of those that generate profits as soon as possible.
Angel investors usually tend to invest their money in businesses which have just been established. They tend to select businesses in which other angel investors are interested. Those who have plans to start up a business may choose to utilize the finances of an angel investor because an angel investor is a person who can provide with enough money to keep the newly established business in operation and eventually strengthen it. Once the business has been established and its owner plans to expand it, only then might the owner opt to employ the services of a venture capitalist.
Another reason why angel investors select certain businesses for investment purposes is because they expect the business to eventually become profitable. For this reason, angel investors generally take more risks than do venture capitalists.
One other important difference between angel investors and venture capitalists can be seen in the amount of business capital which angel investors and venture capitalists typically provide. According to the Small Business Administration, the average angel investor invests US$330,000 – a figure much lower than that of the average venture capitalist investment. Angel investors and venture capitalists also expect different amounts of returns on investment. Angel investors usually expect returns of between 20% and 25%.
Certain angel investors are also classified as accredited investors. According to the Securities Exchange Commission, an angel investor is only eligible to become an accredited investor if the person has either a net worth of at least $1 million or yearly earnings of at least US$200,000.
Venture capitalists do not usually invest in companies by using their own money. Most venture capitalists invest in the businesses which have already been established. In this way, their risks of losses on investment are minimized.
Venture capitalists invest much more money into businesses than do angel investors. The Small Business Administration has found that the average venture capitalist invests approximately US$11.7 million. Venture capitalists also typically expect higher proportional returns on investment than do angel investors. The amount which is expected by venture capitalists typically ranges from 25% to 35%.