Angel investors and venture capitalists are two of the most common types of alternative sources of funding. Apart from loans from banking institutions and other creditors, government grants, bond issuance, and public stock offering, angel investment and venture capital are a viable funding source for startups and budding entrepreneurs that depend heavily on financial resource and backing to become fully operational, as well as for existing businesses aiming to secure additional funding to scale their business operations.
What is the Difference Between Angel Investment and Venture Capital? What are the Similarities?
Similarities Between Angel Investors and Venture Capitalists
There are similarities between angel investors and venture capitalists. First, both are alternative sources of funding. Entrepreneurs and inventors who want to finance their businesses or ideas could resort to these two investors instead of going through the more tedious process of securing bank loans, selling stocks or shares, or issuing bonds.
Another similarity between angel investment and venture capital is that these two funding sources usually cater to startup businesses with innovative and game-changing ideas. Most of the businesses funded by angel investors and venture capitalists are related to science and technologies, as well as to other concepts or ideas that can potentially disrupt the market.
Both also cater to different forms of businesses such as sole proprietorship, partnership, including general partnership and limited liability partnership, limited liability company, and corporation. However, note that sole proprietorship and partnership have structural disadvantages that make them less appealing to investors compared to LLCs and corporations.
Another similarity between angel investors and venture capitalists is that they follow a step-by-step or systematic investment cycle. Both start with a capital infusion and ends the investment cycle with a business exist. In other cases, the investors become shareholders of the business, particularly if the entity decides to incorporate.
Differences Between Angel Investors and Venture Capitalists
Nonetheless, there is a stark difference between angel investors and venture capitalists. For business ventures that do not require large funding, angel investors are a better alternative because the entire process of securing funding is considerably easier and more personal.
However, another difference between angel investment and venture capital is that the former tends to have limited financial resources. Venture capitalists have an established asset, and the overall business operation of a venture capital centers primarily on investing. In other words, venture capitalists are a more viable alternative to bank loans and other traditional investments than angel investors.
It is also worth mentioning that because venture capitalists are actual business organizations, they operate in a more formalized, regulated, and systematized manner. This is a critical difference between angel investment and venture capital. Note that some angel investors are unaccredited investors, and most of them function as individuals.
Furthermore, information or details about individual and organized angel investors are not readily available. This means that unlike venture capitalists, not much is known about their investment and operational activities, background, and capabilities. Hence, it is in this regard that an established venture capital can be a source of competitive advantage.
Takeaway: A Comparison of Angel Investment and Venture Capital
The aforementioned comparison between angel investors and venture capitalists brings forth pros and cons, especially from the standpoint of entrepreneurs or startup business organizations. Take note that both alternative sources of funding remain advantageous because they are willing to finance high-risk ventures without the need for assets or any collateral assets that are usually required by banks. This is the most noteworthy advantage shared by both funding sources.
Another similar advantage is that both angel investors and venture capitalists are predisposed to offer their business expertise toward those businesses in which they have vested interest. This means budding entrepreneurs and emerging business organizations can receive proper managerial guidance from experienced investors.
Both alternative sources of funding can provide startups and small businesses with a competitive advantage. Through their financial capacity, managerial expertise, and experience in a particular industry, these investors can form part of the overall market entry strategy of a business. A suitable business angel or venture capitalist can help a company expand is network and lower barriers to entry.
However, because angel investors have limited financial capacity, they may not fully finance the capital requirements of an emerging business. Again, venture capitalists are a more feasible and logical alternative in this regard.
In conclusion, it is essential to note that angel investors and venture capitalists remain different in considerations of their varied business interests, focus, and penchants. Angel investors tend to operate as pure and personal investors. They simply are people or groups of people who want to grow their wealth further while doing something productive from their unused assets.
On the other hand, venture capitalists are formal and organized businesses. They are companies with the prime intent of making profits by betting and investing in potential business ventures. Their primary business model revolves around scouting for businesses with potential for growth, screening the selection, and providing financial assistance to selected businesses.
