Angel investor vs VC - what is the difference?
Whilst an angel investor is an individual, a VC (Venture Capital fund) is an entity that raises money from various sources and then deploys it into startups.
Each are relevant at different stages of your journey: typically you would raise angel investment first and VC money later, but there is often crossover. Each will have different objectives, expectations, and terms when investing in your business - so it’s important to understand the difference.
A typical angel investor:
Will invest at the very early stages, often being one of the first funders to provide significant investment to a startup. They may continue to invest in subsequent rounds to maintain their shareholding.
Will expect at least a 10x return within 5-10 years but this is not a rule
Investing for financial return and to utilise their knowledge and contacts to support the growth of a company they’re excited about
Will be utilising government tax schemes like EIS
Will usually invest on the same terms as the founder
Will provide support where relevant or needed
Realises their return when the startup is sold or goes public
A typical VC:
Will come in at later stages than an angel investor i.e seed/ series A. However, many VCs now have pre-seed funds and will be first investors in.
Only invests in startups with BIG growth potential (the top 1%)
Investing purely for financial returns in order to meet their return on investment objectives for their LPs (Limited partners are the entities that have invested their money into the fund). If the VC is linked to a corporate, there may be an innovation objective).
Will provide a lot of support and connections, especially if they’re a specialist in your industry and if you’re on a high-growth trajectory
Will usually hold preference shares in your company with liquidation preferences, meaning that in the event of an exit they will be paid first (after any debtors) and have a guarantee of getting a 1x (sometimes 2 or 3x) return on their investment from the process of the sale before the founders or other investors receive their share.
Will often be an active member on your board influencing the direction of the company
Realises their return when the startup is sold or goes public
Who should you approach for your raise?
Is this your first round of investment? Angels are usually a good first port of call before going to a VC
Are you in the top 1% of companies in terms of your growth potential? If the answer is no, the VC route may not be for you
Does your company not align with any the requirements of an angel or a VC? If your startup is not investable, you may want to explore different types of funding like grants, crowdfunding, or debt.
