7 Points of Difference between Venture Capitals and Angel Investors
I am writing this article on request of one of my readers who wanted to know the in-depth difference between the two types of startups. I will try to cover the maximum aspects of each in the most lucid manner. Though I have an article “Types of Startup Investors” where you may get an idea about the different types of investors. To understand which investor invests in which stage and how the founder’s equity dilutes with each round of funding read “Startup Investment Journey- From Zero to Billionaire”.
According to NASSCOM: Total Investment made by Angel Investors in the year 2015 is $ 196 Million Vs $ 4,705 million by VC/PE. Majority of the angel funding has gone into B2C segment (68%) and rest in B2B (32%). To be more specific about the sectors, which attracted the angels, most are:
Consumer Services———- 12%
For VC/PE Firms as well B2C had been the most attractive destination with majority of investment (83%), sector wise break up of which is:
Hyperlocal E-Commerce————- 08%
Consumer services——————– 07%
It is very much evident from the above figures that E-commerce and Aggregators are not only popular amongst the consumers but also the investors. One can also make out quickly from the figures that the amount invested by VC/PE is much higher than the amount invested by angel investors because the deal amount of the later is much low as compared to the former. We will talk more about it later in this article.
Startups are the hot selling cakes. Though these are the high-risk assets but every day 3-4 investment deals are happening. Startups are interested in raising fund from sources like Angel Investors, Venture Capital and Private Equity Firms because during their initial stages sometimes they are not generating revenue, or the cash burn rate is high, or they have not reached a position to raise money from sources like Public Markets, debt Loan or Public Offerings.( Read Debt Vs Private Equity). Although startups have to shell out a bigger pie of their equity for quiet a lesser amount of investment but provided the risk angels and VCs take by investing these high on risk assets it is justified.
All the types of investors in above-mentioned article “Types of Startup Investors”, could be differentiated on the basis of what stage of the company they are funding. With each growth stage, risk in the investment decreases, amount of money to be invested by investor’s increases and the equity portion in return of investment also decreases.
Coming to the 7 Points of Difference between Venture Capitals and Angel Investors
1. What they are:
Are the High Net-Worth Individuals (HNIs), who generally forms closed groups called angel network and collectively invests in a venture. Angel network helps them to make more informed investment and reduce the risk of an individual as pool of investors are investing small amount in multiple companies.. They do it in exchange of equity in the startup. Examples of Angel/Angel Networks active in India are- Mumbai Angels, The Chennai Angels, Indian Angel Network, Hyderabad Angels, The indus Entrepreneurs.
Venture Capital Firm:
These are the mostly the Limited Liability Partnership firms/funds, which raises fund from different investors. As against Angel investment where the decision of investment rests with the individual, a Fund/ Portfolio Manager in Venture Capital firms is the one who hunts for promising deals to get the best returns for their investor’s money. Example of VC/PE active in India are- Kalaari capital, Nexus Venture Partners, Accel Partners, Tiger Global Management, Helion Venture Partners etc.
2. Whose Money is invested
This is the main parameter what differentiates an angel investor. The “fund”- Angels invests in businesses in their own capacity
Angel Investors –
Angel investors, invests their own money in the ventures after doing enough due diligence on their part. They often forms groups and pool their money to invest together. But this requires the domain know-how and also investors have to invest their time to hunt the deals, meet with the founders, documentation of investment, monitoring on the use of funds by the startup.
Venture Capital Firms-
This is an investment firm, which raises money from various HNIs/ investors and invest it on their behalf in various startups. VCs have fund/ portfolio managers to manage their investment portfolio. They have a dedicated and skilled team, which looks out for promising opportunities, and get the deal closed.
3. Who Makes the Decision
Since the money involved in this case is their own, due diligence is made by the investors. Since angel investors invests in the very initial stages of the company, there are very few numbers available to convince the investors, most of the deals are made on logical hunches- like the scalability of the idea, Product Market Match, Founding Team. Read “What investors look for in a business before investing” for details.
Venture Capital Firms
As against angel investors in case of VCs the portfolio manager hunts for the most profitable deals for the investors who have contributed to the fund. On an average, a fund is raised for 10 years. So, fund manager is even more diligent than the angel investor in choosing the right deal.
4. Stage of Investment
Startups are a risky asset, 90% of the companies, which are born dies. Only 1% gets funded and Out of 10 funded startups, 7 companies die. That means there are very high chances of your money being wasted. That means the initial stages are the most crucial ones and involves highest risk.
Majorly there are four stage of any startup
- Seed Stage
- Early Stage
- Growth Stage
- Expansion Stage
Angel investors are the high-risk takers. They can bet their money on the idea as well if they feel the potential in it. Now, since they are taking much risk than a VC (who invests in later stages) they expect greater chunk of your equity and high returns.
Venture Capital Firms
Venture Capitals generally invests in Growth stage (Series A) and forward, when the company has some proven numbers. As compared to angels they are less risk takers.
5. Size of Investment
Angels generally invests in the Seed Stage or the Early Stage, the average amount of deal for both being $ 0.7 million (approx. Rs. 4.2 crore) and $ 2 million (Rs. 12 crore) respectively, for the year 2015.
Venture Capital Firms
Since venture capital firms majorly (95%) invests in Growth Stage or Expansion Stage, the average amount of deal was $ 2 million (Rs. 34 crore) and $ 36 million (Rs. 216 crore)
6. Their Support System
Since the performance of the company entirely decides the fate of the investor’s money, angels do guide the startups (sometimes felt a poked nose) in all the matters. A member from the angel investor group takes the seat in the board of members as well, till the Venture Capital Firm invests unless angel is still the significant contributor.
Venture Capital Firms
Venture Capitals are more professional in their approach and guidance. With their alliance comes a huge support system of high profile contacts, experience etc.
7. What they take in return
Both angel and VCs demand 20-30% of the pie. Keep in mind that 20% of an angel is a smaller amount as compared to 20% of VC because the the equity is divided on the post valuation basis. Refer “Startup Investment Journey- From Zero to Billionaire”.
|ANGEL INVESTORS||VENTURE CAPITALS|
|What are they
|HNI, Angel Group||Limited Liability firms|
|Whose money is invested||Angel Investor’s||Firm raises capital from other investors. The company does not own the money invested.|
|Who makes the decision||Angel Investor||Fund/Portfolio Manager|
|Stage of investment||Seed and Early Stage||Growth and expansion|
|Size of Investment||Roughly Rs 8 crore (2015)||Roughly Rs. 125 crore (2015)|
|Their Support System||Good||Very professional and good|
|What they take in return||20-30% stake and seat in management board till VC invests||20-30% stake and necessarily a seat in the board|
Although the concept of Venture Capital, Angel Investors, even more popular terms like “e-commerce” and “startups” itself is not yet clearly defined in Indian regulatory context. Each day we will hear news about these terms getting defined by government and regulatory authorities of India. Very recently, (28 November 2015) SEBI (India’s Capital Market Regulator) recognized the Angel Investments under the ambit of its Alternative Investment Funds (AIF) and published the guidelines for the same. Which means that SEBI now angel investors can avail the tax benefits that were earlier available to venture capital firms only, provided they fulfill the conditions.
<a href=’http://www.freepik.com/free-vector/charity-donation_761305.htm’>Designed by Freepik</a>