Many startup company founders I meet think that angels are just a smaller version of venture capitalists. This assumption is inaccurate and can lead to significant misunderstandings in fundraising, including the possibility of being unable to raise funds. Below I’ll explain the key differences between angel vs. VC investors so you more closely understand your fundraising options.
Angel vs. VC Investors: Definitions and Roles
I have had considerable experience with both angels and VCs, regarding investing in startup companies. I have created and managed the very successful 3i Ventures venture capital fund in California and been one of the ten co-founders of Tech Coast Angels, which is the largest angel investment group in the country.
There are a few notable differences when it comes to angel vs. VC investors and their roles. Angel investors are typically wealthy individuals interested in investing in early-stage companies. Their appetite for investment can vary from $10-$25,000 up to millions. They generally fall into two categories.
1) Super-angels who frequently invest over several hundred thousand dollars and up to several million at a time.
2) Members of an angel group where Investments typically involve as many as 20 or more individuals investing $25-$50,000 each for a total of $500,000 to $1,000,000 or more.
Most angel investors interested in high-tech investing made their money by being a successful company’s founder, CEO, or key employee. Some might have had several successes, but their wealth generally comes from being a successful participant in a successful company.
Angels generally prefer to play an active role in their portfolio companies. However, in cases where many angel investors are involved, the group might choose a single representative to serve on the board of directors or as an advisor. When assisting portfolio companies, angel investors often bring the experience of one or two successful companies, which may or may not be closely related to the Portfolio company.
How are VCs Different in this Aspect?
Venture Capitalists are partners in a venture capital fund that has raised its capital from several limited partners. The limited partners pay the managing partners to manage the fund and pay them a percentage of net profits referred to as carried interest. Venture Capitalists often play an active role in their portfolio companies, serving as directors or advisors. Because venture capitalists are full-time professional investors, they frequently serve on six to ten boards of directors simultaneously. Over several years, they may serve on fifty or more boards of directors.
The Differences in the Source of Funds Between Angel and VC Investors
Angel investors usually invest a small percentage of personal wealth obtained from a prior successful business venture.
Venture capitalists invest capital provided by their limited partners. The managing partners design most venture capital funds to support at least thirty portfolio companies, as that number statistically assures a relatively safe return on investment.
Investment Size and Stage of Angel vs. VC Investors
Angel investors most typically invest as a group in the range of $500,000 to one to $2 million. There are exceptions above and below, but most investments fall into this range. Venture capitalists typically invest much larger amounts. So, there is a significant difference in the funding amounts between angel vs. VC investors.
For instance, venture capitalists typically invest a minimum of $5 to $10 million or more in companies. The top-tier venture capital funds (top 50, for example) manage very large amounts of money and cannot afford to make investments smaller than about $10 million. In 2024, 17 US venture capital funds raised individual funds over $1 billion.
It’s important to understand that the venture capital industry is very top-heavy. Every time there’s a downturn in IPO activity, the top-tier funds manage to support their companies for several years until the IPO market reopens. However, the smaller Funds often run out of capital and cannot protect their investments. Consequently, the large firms continue to be successful and raise ever larger amounts of capital while the smaller funds slowly go out of business.
Differences in the Decision-Making Process
There’s a significant difference in the decision-making process between angel vs. VC investors.
For instance, angel investors usually make a group decision. Each investor might do his or her due diligence work, or a group of angel investors might work together on that. In either case, before the group commits, it is probably necessary to get the approval of ten to twenty or more individuals before the group will commit to an investment.
For venture capitalists, the decision-making process is more compact and efficient. Usually, only a few general partners commit the fund’s capital. So, the decision process is mostly one of obtaining a majority, a plurality, or a unanimous decision of the partners, depending on how the fund chooses to operate. Most venture capital funds also have research associates and other resources to assist in due diligence, so the partners’ staffs do extensive research, background checking, competitive analysis, and market analysis.
Involvement and Support
Angel investment groups typically select one or two representatives to be actively involved with their companies. These members provide assistance based on their previous experience. These representatives typically sit on the board of directors and advise companies concerning strategy, financing, marketing, operations, etc.
Venture capital firms generally select one partner to sit on the board of directors and advise the company. This is usually the one that has led the identification and due diligence on the portfolio company.
Another key difference when it comes to angel vs. VC investors is that the top-tier venture capital partners have extensive experience dealing with companies. They have often sat on thirty or more boards of directors and assisted multiple companies in strategy, mergers or acquisitions, and IPOs.
Not all startup companies can attract the attention of these top-tier venture capital firms. Still, it’s important to understand the value they can bring to a startup based on their previous experience and extensive network of contacts.
There is Different Risk Tolerance, and Expectations Between Angel and VC Investors
Angel investors know they are playing a risky game and do everything possible during their due diligence to identify and minimize risks. Their overall expectation is generally to make about ten times their investment in five years, roughly a 65% internal rate of return. These expectations are roughly in line with venture capitalists. However, both angels and venture capitalists have certainly learned that the time from initial investment to exit is frequently longer than five years.
I believe angel vs. VC investors usually take more risk because they typically have less access to follow-on capital when required. Many angel investors also take greater portfolio risk because they do not have the resources to make the thirty to thirty-five investments required for portfolio safety.
Venture capitalists often take more risk because they invest in companies with ambitious product and market plans that often require more time to achieve profitability and multiple additional rounds of capital. Venture capitalists have a risk advantage in the form of building portfolios of thirty-five companies or more, which gives them some statistical protection against disastrous losses.
Angel Investors and Venture Capitalists Also Have Different Exit Strategies
Angel investors expect to exit their investments within approximately five years, but that is not always possible.
I had an ongoing debate with one of the co-founders of Tech Coast Angels about the magnitude of Investments and expected exit periods. He argued that all we had to do is take a company from a $1 million evaluation to $10 million to get our 10 X return. I never felt this was realistic, and I believe it rarely occurs. But it reflects the expectation of some angel investors who don’t expect to make significant follow-on Investments.
Angel Investments average four to seven years to exit, and evaluations are usually between $20 million and $100 million. Exits by IPO usually take about ten years.
Studies have shown that an Angel investment portfolio of ten companies is statistically likely to return about three times over five years. This rate of return approximates a 25% per year compounded return.
Venture capitalists generally invest more money and build larger companies with more opportunities for going public. Although some exit by acquisition. Also, because of their extensive networks, venture capitalists can often help their companies connect with investment bankers who take companies public.
Venture capitalists may be slightly more subject to the vagaries of IPO markets, which can be heavily impacted by external economic conditions. However, this is little solace for angel investors, as the acquisition market tends to get tighter when the IPO market is soft.
I hope this helped you understand key differences between angel investors and venture capitalists so you can build a foundation for making informed decisions when seeking funding.
My next post will follow up with the advantages and disadvantages with angel vs. VC investors and the facts you need to consider to choose the right investor for your startup.
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