What is the Difference Between Angel Investment and VC Investment?

All this talk of angels and venture capital may be entirely unfamiliar for those starting  a new business venture for the first time. Here I want to explain these terms and provide some clarity for those who think an angel investor comes from the clouds, or that venture capital is some type of financial scam. Those familiar with these terms may still want to know some of the nuances of each so please read on.

angels from the clouds

An angel, when used with reference to funding a new business, is actually an individual investor that typically invests at the very early, pre-revenue stage of a business. Like any investor, they want to see a return on their investment but they’re also motivated by a desire to see new and innovative businesses succeed – sometimes for the sake of innovation itself.

A typical angel investor will invest in a business that’s part of an industry that they understand intimately and are probably still involved in day-to-day. They will more than likely want to offer advice and support to the business they have invested in so it’s not just about the money. If you’re seeking money from an angel investor then it is perfectly normal to allow them some type of influence regarding strategy and direction.

The amount of money you might expect from an angel investor is in the range of $10,000 – $100,000.  This could be even more if they are from an organised group of angels like the Australian Association of Angel Investors (AAAI). AAAI has sub groups in just about every major city in Australia.

In summary, an angel investor is:

• An individual investor
  
• Someone willing to invest in early-stage or start-up businesses
  
• Investment amounts: $10k – $100k, sometimes a bit more, groups could go up to $1m
  
• Have experience and contacts to contribute
  
• May be willing to be “hands-off” or “hands-on” adding important skills.
  
  

The venture capitalists

So now your business is up and firing and you’ve built a solid platform that’s generating cash. You might now be in a position to seek funding from a venture capital fund. A venture capital fund is money that is managed on behalf of others – typically large institutions. Some venture capitalists like to invest in a business immediately after a business has moved beyond the initial angel investor stage. Others prefer to wait a bit longer before they invest and will only be interested after a business has received a first, or even second round of venture capital investment.

Venture capital firms will be focused heavily on financial returns and businesses that offer a lot less risk than early stage start-ups. While angel investors limit their investments to relatively small amounts, venture capitalists tend to think of a starting point for funding to be around $1 million.

You will find that a venture capital fund expects to exercise more direct control over your business. They will do this by setting achievable milestones for your business and by having at least one seat on your board.

In summary, a venture capital firm is:

• A company or business rather than an individual
• Seldom interested in early-stage start-ups, unless compelling reason (eg. high tech with already successful founders)
• Investment amounts: +$1M up to $10m
• Have deep industry contacts
• Require seat on board
• Operate as a general partnership (GP) with limited partners (LPs) as investors
  
  

Finding the right investor for you

Understanding the difference between an angel investor and a venture capital firm is pretty straight forward. You probably already have an idea of the one which is right for your business. Finding them and getting them to invest in your business is the difficult part. Those seeking Angel investment in Australia can get started with websites like:

• the Australian Association of Angel Investors; or
• the Entrepreneur Investor Network; or
• Find Angel Investors; or
• the Australian Investment Network.
  
  

Venture capital firms will be more difficult to contact. They receive hundreds of applications from companies across many different sectors. The prominent firms include:

• GBS Ventures
• Starfish Ventures
• One Ventures
• Square Peg Capital
• Yuuwa Capital
  
  

There are many more and the focus tends to be on IT, Biotech or Cleantech companies. There are funds that invest in more traditional sectors like manufacturing or consumer goods. These include CHAMP Ventures or CVC Ventures among others.

In addition, there are service providers that offer introductions to both Angels and venture capital firms like Wholesale Investor – where I currently work. Wholesale Investor has a subscriber base of over 8,600 High Net Worths including retired CEOs, C-Suite Execs, Family Office trusts, Entrepreneurs, and others.