Differences Between an Angel Investor and a Venture Capitalist

One reader asked via email:

I am interested in becoming a full-time investor and am learning the ropes. What are the differences between an angel investor and a venture capitalist? It seems like they are doing the same thing, more or less …

As you learn more about private investing, you will come across a couple of terms, angel investor and venture capitalist, that seem the same, but somehow different. Don’t let the language confuse you.

Angels are Like Venture Capitalists Because . . .

• Opportunities exist in a variety of markets around the globe for both angel investors and venture capitalists. Just a short while ago, green technology was the ‘hot field of investment’ and environmentally conscious startups created plenty of chances for angels and venture capitalists to “go green” with their investments.
• Angel investor or venture capitalist, you should expect when you invest in a startup company that you’ll be part of the program for a while, typically 3 to 7 years. Naturally, you want to stay on top of your investment, attend meetings, ask questions; at the same time, have patience and give the enterprise time to mature and grow. Rome wasn’t built in a week or a month, yet most people agree that the result was worth the wait.
• Critical evaluation of the startup is a necessary first step for any investor, angel or venture capitalist. It may seem more like homework than high finance, but successful investors insist that you must size up a number of factors, including the business environment, the players, and the nature of the deal. Console yourself with the knowledge that yesterday’s nerds drive slick cars and vacation on Bimini today.
• No one can predict the future. Angel investors and venture capitalists all experience setbacks – in other words, the thing never gets off the ground and the investor loses money. Knowledgeable angels recommend spreading your investments around several startups; one spectacular success can offset other, less spectacular, projects.

Angel Investors are Different

• Venture capitalists most often are associated with a professional investment firm. An angel investor usually acts solo. Does this mean you’re not a professional investor or that you’re hung out on a limb, all by yourself? Absolutely not – you can launch your own LLC, join an angel group, or syndicate with other angels to fund a promising startup company. In fact, angels in the know say it’s best to pool your resources and experience with other experienced investors.
• You, the angel investor, will use cash from your own pocket, or bank account, to fund your deals. When it comes to your investment business, you are the boss. Venture capitalist firms usually solicit working capital from insurance companies, pension funds and other large investors. The venture capital firm is the general partner, the investors are limited partners.
• Angel investors are often more willing to fund innovative startups in the very earliest stages of development and with no track record. Venture capitalists are not so easy-going; they want a bit more history behind their prospects. That isn’t to say that angel investors are “financiers gone wild”; it simply suggests that you’re willing to look at proposals that might not even get in the door at a venture capital firm.
• Venture capital firms are highly organized enterprises that put together deals in excess of $4 million. With the exception of organized angel groups, you and your fellow angel investors are usually informally coordinated, and your investment in a single deal will be smaller, ranging from US$10,000 to US$200,000 per individual angel. According to a survey of Angel Capital Association members, the average pooled investment in 2008 was US$281,000.