With India’s startup ecosystem growing at an exponential rate, venture capitalists and angel investors would give an arm and leg to know which nascent business could be the next Uber, Facebook, Airbnb, or Tesla. Founders too have been left dizzy with the increase in windows to funding with little clarity on which investment route might be best for their business. Understanding the difference between angel investors and venture capitalists could be the first step towards making the right funding decision.
Who are Angel Investors
Angel investors who provide seed funds typically provide critical, first stage of funding to help businesses start developing their product or service. For instance, entrepreneurs might approach angel investors after they bootstrap their business or raise funds from immediate family members or friends. At this stage, the business might not be able to prove its viability, making this a high-risk investment for an angel investor. That’s why most angel investors make a decision based on their impression of the founder or what their years of experience tells them about the business idea.
Remember, that angel investors are high net worth individuals with a great deal of experience in a certain sector. And they choose to invest in innovative businesses that operate in sectors that they are familiar with. Lastly, while entrepreneurs get incoming cash flows, from angel investors and access to their expertise and network, investors are given a proportional amount of equity in the business.
Who are Venture Capitalists
Unlike angel investors who are individuals, venture capitalists are part of firms where funds pooled together are invested strategically in businesses with strong growth potential. Venture capitalists too get equity in the company in return for the capital flow they are able to provide a business with. However, unlike angel investors, they simply won’t invest without evidence of strong market traction.
Some key differences between angel investors and venture capitalists are stated below
Angel investors mainly provide financial assistance in the early stages of business. Venture capitalists go a step ahead and provide support and resources for things like talent management, building competitive products or services, and developing a wide-ranging market potential. In other words, if a founder has secured venture capital funding, then his/her business gets more than just cash inflows. Venture capitalists are bringing to the table their industry insights, networks, support, and mentoring abilities. To a founder, this could be as valuable as the funding itself.
All this of course comes with a price tag. In return for funding and expertise, business owners are expected to provide a substantial part of their business equity to venture capitalists. In fact, by the time a company reaches its series A or B, there are high chances of the founder being left with little control of the company. In a sense, this makes venture capitalists closer to active partners. On the other hand, angel investors are considered passive in the way they exercise their rights and duties as partners.
Let’s say a company is in the final stage of product development and looking to take the product to market. An experienced angel investor could play a substantial role in taking the product to market by guiding the founding team and by helping make the product more fit for the market – apart from providing financial assistance.
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For entrepreneurs, sourcing funds with angel investors works out to be a better option than taking out loans. In fact, loans can look exciting, especially because banks don’t demand for equity in companies in return for credit and do not play an advisory or active role in the organisation. However, loans might not be the best route for a business to take in its nascent phase.
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