Tuesday 5th of April 2022
Angel investors and venture capitalists are often called investors who fall under the same umbrel
...la. However, it is a myopic view of these two sour...
Angel investors and venture capitalists are often called investors who fall under the same umbrella. However, it is a myopic view of these two sources of financing. Although they are involved in financing a business or start-up, they differ significantly. They can be easily distinguished based on their size, approach, strategy, and post-investment role.
Entrepreneurs should know what angel investors and venture capitalists are and how they differ to identify the right funding method for their organisation. Since capital is an ongoing need of an entity, finding an investor becomes necessary for many small business owners. So, let us help you understand the difference between these financiers for a positive cash flow.
What Is An Angle Investor?
An angel investor is a high-net-worth individual who invests his wealth in start-ups and early-stage businesses in exchange for equity or convertible debt. Since they are not a financial institution or a bank, they take a lot of risk by investing their savings into an upcoming venture that promises high returns. They are not bound by any restrictions like banks and invest according to their free will. So, they are not deterred by high-risk propositions like a start-up or a newly acquired business for sale in South Africa being led by an aspiring entrepreneur.
Angel investors can be wealthy acquaintances, family members or friends who are willing to invest their own money. They are more involved with the people involved in the business rather than the idea. They are industry experts or veterans and often help start-ups with their knowledge and experience.
What Is A Venture Capitalist?
A venture capitalist can be an individual or a group of investors who are approached for funding by entrepreneurs who have surpassed the introduction stage of their business lifecycle. Usually, venture capitalists enter the business after it has been elevated with the help of angel investors. They do not use their own funds but raise funds from various sources to invest in a business in exchange for equity.
Venture capitalists raise funds from third parties, including banks, insurance companies, financial institutions, etc. It helps those small businesses that do not get loans from banks because of the high-risk nature of their ventures. Similar to angel investors, venture capitalists also assist businesses with suggestions and advice for growth.
How Do Angel Investors and Venture Capitalists Differ?
Start-ups and small businesses are in need of funds to sustain and grow in the competitive landscape. Usually, they approach angel investors and venture capitalists but are unaware of the key differences that set them apart. Here is what you need to know about them before securing funds.
As stated above, angel investors work independently, whereas venture capitalists are employees of a venture capital organisation or firm operating in South Africa. The former are wealthy business people who are known as seed investors and fund start-ups because of their interest in the field.
They want small entrepreneurs to grow and become successful because they are passionate individuals who wish to mentor others. Venture capitalists are professionals who get involved in the business and help it grow.
Angel investors provide funds to start-ups and businesses that are trying to get off the ground. They do not need a large investment. It usually ranges between $50,000 and $250,000 to launch the company and provide its working capital. Since they are individual investors, they have a limited capacity even if they come together as a group.
Conversely, venture capitalists invest a huge sum of money into established companies, such as a newly acquired business for sale in South Africa that needs funds to expand. Raising this kind of amount is not possible through loans and getting money through crowdfunding. The money offered by venture capitalists can go up to $5 million to meet the needs of a high-potential business.
Angel investors provide the investment and gain equity in return. They may offer some advice and help build the business network if the entrepreneur wants their assistance. Otherwise, they may remain an absentee stakeholder. Angel investors do not interfere with the working of the company, which makes them highly sought-after among aspiring entrepreneurs with innovative ideas. On the other hand, venture capitalists are highly involved in the business they fund. They want the entity to succeed by creating marketable and satisfying products and grow with time.
Thus, they help in deciding the strategy of the business and play an important part in establishing the management in the company. They can even ask for operational control and a higher stake in the business than angel investors. They are influential in accelerating the growth engine and giving the company the push to gain a bigger market share. Some business owners consider the involvement as interference and loss of control. Thus, you need to choose the funding option carefully.
Another difference in their approach to funding is the type of business they choose for financing. Angel investors pick only early-stage businesses that are trying to enter the market. They help to accelerate the initial start-up development of a high-potential entity. Since they do not research much because they operate individually, they find it easier to use their instincts for financing.
Alternately, venture capitalists go for well-established and already-running businesses that have created a space in the market. They identify entities that have displayed a successful introduction stage and have the capability to grow into a bigger business. They undertake thorough due diligence of the business and make an offer after satisfaction. They provide financing to help them realise their expansion plans and develop rapidly.
Wrapping Up
Understanding the difference between the two types of financiers is essential to ensure you are approaching the right one. Also, determine the needs of your business and its growth stage before preparing the funding pitch for the investors.
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