Venture Capitalists vs. Angel Investors: What’s the Difference?
May 26, 2011
Recruiting talent to hot startups and expansion stage businesses brings with it a unique challenge.
It’s often not enough to explain the nuances of the company, its product, the business’s sales process, and the employee’s compensation package. Typically, candidates want to know about the company’s funding and financial backing too.
When I started out in venture capital and startup recruitment, I knew there was more to my role than just understanding the job description in my hands. I quickly learned that I had to be prepared to answer some basic questions.
- What series funding has the company received?
- What’s the difference between each series of funding?
- What’s the difference between venture capital vs. angel investments?
That last question is particularly common, mostly because angel investments and venture capital are often confused.
So, let’s compare and contrast.
Business consultancy Growthink suggests there are four key distinctions between angel investors and venture capitalists:
- The amount of money invested
- The professionalism of the investor
- Whose money is being invested
- Whether the investor takes a seat on the company’s board
Now, let’s define angel investments and explain why they exist. Ben Horowitz at BusinessInsider does a great job defining angel investors, explaining that they emerged as a response to changing market conditions and investment needs for high technology or software startups
In today’s world, some startups need only a small chunk of cash to move their business forward and would prefer to do it without the involvement of a venture capitalist that will request more control and input. That’s where an angel investor might make more sense.
Angel investors are usually interested in the really early formation stage of new companies that are just getting their idea off the ground. In that environment, smaller sums of money are typically invested (sometimes as little as $50,000). Angels tend to be wealthy folks who invest their own funds, providing a cash injection that can help the company build out its product.
As a rule of thumb, angel investors do not require any sort of control in operations, nor do they mandate a seat on the board of directors. Generally, they prefer to stay away from complex terms and lengthy due diligence processes, and often decide whether or not to make an investment after one or two brief meetings.
For more, check out This Week In Venture Capital’s video interview with angel investor Thomas McInerney. The video runs about an hour long, so you’ll need to spare some time to watch it. But McInerney’s insights will give you a very clear picture of who angel investors are and what they look for in an investment.
Now, how is Venture Capital different?
When compared side-by-side to angel investors, Venture Capitalists are an altogether different species.
A VC typically involves corporate entities that use funds from other investors – sometimes large institutions – and manage that money by investing it in growth businesses. The venture capital funding arrives when a business idea is more established and needs cash to finance its accelerated growth stage.
The volume of money at stake in the venture capital scenario is usually much larger, as VCs tend to prefer to invest a minimum of $3 million. And unlike an angel investment, that money goes toward far more than product development.
For example, venture capital funds may be used for:
- Hiring new staff: Growing companies need to scale their sales, marketing, and product development organizations, and venture capital funds can help do that.
- Procuring office space: With new staff often comes a need for larger workspace.
- Market advancements and acquisitions: Smaller companies without access to the necessary capital may struggle to take advantage of certain market opportunities. A large infusion of cash from a venture capitalist can help open up those doors.
After a venture capitalist performs exhaustive due diligence by qualifying the prospect and meeting its executive team on numerous occasions, a decision will be made. When the investment is completed, a member of the venture capital firm will hold a seat on the portfolio company’s board of directors and the VC will often begin providing operational support to the business.
In OpenView’s case, a lot of that operational support comes from the OpenView Labs team. It acts as the firm’s consulting arm and provides functional marketing, research, analytics, and recruitment assistance to the companies we invest in.
For businesses that are ready for – and need – that help, it’s an ideal marriage. But not every company is at the stage where a venture capital investment makes sense. Selecting the right type of funding is critical to the future of your startup. The wrong decision could put your business in serious danger. Just ask Friendster about that.
So, if you’re considering funding, make sure you do your own homework first. And if you’re trying to recruit top talent that wants to know your company’s funding situation, make sure that you can explain it to them in the clearest terms possible.
Victor Mahillon is a recruiting analyst at OpenView Labs, where he is responsible for recruitment for the firm and its portfolio companies. You can follow him on Twitter @vmahillon.