Angel Investors vs. Venture Capitalists

Instructor: Beth Hendricks

Beth holds a master's degree in integrated marketing communications, and has worked in journalism and marketing throughout her career.

Businesses looking for funding can build their financing strategy around an investor and there are a few options for how to do this. This lesson will explore two of those options, angel investors and venture capitalists.

Funding a Start-up

Mel has a great idea and solid business plan for a technology start-up in his hometown. The only problem is, Mel lacks the financing to launch his business and dreams of being an entrepreneur. He knows there must be a way to secure investors to help him get started, but he's unsure where to begin as this is his first time starting his own business. He has heard of angel investors and venture capitalists, although he doesn't know what each does or if either is a good fit for his business. Let's give Mel some definitions and insight into what angel investors and venture capitalists are all about.

What are Angel Investors?

Angel investors support small start-ups and entrepreneurs through funding, either with a one-time investment or as an ongoing source of finances, to help a fledgling business get off the ground. Angel investors typically act alone, and may choose to be hands-on or hands-off in other areas of the business. Angel investors are investing in the individual starting the business, more than the viability of the business itself; they are more focused on helping an entrepreneur get started than any possible profit that could be gained. Angel investors average approximately $30,000 per investment.

Angel investing, sometimes called informal investing, angel funding, private investing or seed investing, dates back to the 1920s when rich supporters of the arts financed the first of the Broadway plays. Angel investors are affluent individuals who use their own money to build capital for new businesses, in exchange for ownership equity or shares in the business. In short, they get involved in projects because they are personally interested. The relationship between an angel investor and an entrepreneur takes on a mentor/owner flavor. The downside of an angel investor is that they don't typically have access to huge sums of cash for additional financing.

What are Venture Capitalists?

Venture capitalists generally involve a group of individuals, a company or a business, rather than a single individual. They are more interested in investing in a well-established business, as opposed to start-ups by new entrepreneurs, and their involvement usually includes an added role in the company, such as a seat on the board of directors. Venture capitalists are more likely to invest in a company after the concept has been proven and revenue has been generated, in an effort to grow the business more quickly. Yet, they may also consider investing in a seasoned entrepreneur who has proven his or her abilities with past businesses. Venture capitalists fund up to an average of $7 million in each investment.

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