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

If there is ever a time that businesses and entrepreneurs need funding, it is now. The global economic fall out occasioned by the COVID-19 pandemic makes the situation even dire for many business owners, especially those who are just starting out. To give your dream business a chance of survival, capital is sacrosanct but you must know the right way, place or when to source funding and how.

There are different ways to raise capital for your business, ranging from bank loans, which are cut-throat these days, to seeking equity investments from Angel Investors, Venture Capitalists (VCs) among others.

If you’re wondering how angel and VC investments work, this piece will simplify it for you. Angel Investors and Venture Capitalists are primarily financial backers who invest in businesses and expect to earn a good Return on Investment (ROI). However, the motives of the two investors are different.

Let’s take a deeper look at their core roles in the life of a business.

Who is an Angel Investor?

An Angel Investor, (also known as private investors, seed investors or angel funders) is a wealthy person who invests in a startup business in exchange for equity – usually 10% stake at least. The funding from an Angel Investor is sometimes a one-time investment just to help the business kick-off. It could also be a continuous investment to help the business through its stormy stages. 

Typically, Angel Investors have spare funds and are always looking for investments that can give them a high-rate return that they can’t get from traditional investment opportunities. They, however, know that investing in these startups is highly risky and that the business may fail. Most of them invest more in the entrepreneur than the viability of the business. That is why Angel Investors are often found among family and friends.

It is pertinent to also know that Angel Investors may expect up to 20% to 25% ROI and they may be equal partners in the business or sometimes have controlling equity. The upside is that many Angel Investors are focused on helping entrepreneurs take their first steps and succeed, and not the possible profit they stand to gain. Plus, if the business fails, they don’t expect to be refunded by the entrepreneur, unlike other lenders who would recover their debt whether the business succeeds or not.

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Origin of ‘Angel Investors’

William Wetzel, a then-professor at the University of New Hampshire and founder of its Center for Venture Research, first used the term “angel” in 1978 to describe wealthy people who gave their money to Broadway theater entrepreneurs whose productions were going to be shutdown. Wetzel’s pioneering study recounted how the theatrical productions raised seed capital from the investors.

Who is a Venture Capitalist?

Venture Capitalists (VC) are the opposite of Angel Investors. They invest in companies using other people’s money. They pool funds from investment companies, large corporations, and pension funds. Venture Capitalists don’t invest their own money.

Mostly, Venture Capitalists invest in established businesses or small companies that are already showing signs of commercial success – this is done to minimise the risk of losing their investments. The advantage of a VC investment is that the business capital it commits is substantial compared to that of angel investment.

According to the US Small Business Administration, the average venture capital deal is $11.7 million while angel investment is $330,000. 

Overall, the two types of investments are helpful depending on the stage your business is. If you are a new business owner, an angel investor is what you should be seeking and if you are looking to scale your business and drive expansion, a Venture Capitalist would be your best fit.