The Pros and Cons of Working with Angel Investors vs. Venture Capitalists
Explore the advantages and disadvantages of partnering with angel investors and venture capitalists in your business. Align your goals and aspirations with Marquee Equity.
By teammarquee . June 9, 2023
While securing venture capital is everything in entrepreneurship, it’s critical to understand the investors who are going to be a part of your business. Deciding whom you want to work with is important because angel investors and venture capitalists should always align with your business’s vision. Angel investors and venture capitalists both have the capital to offer but have key differences from each other. This article will help you decide which one is better for you by discussing the pros and cons that come with each class of investors.
Before we get to that though, know what both of them are:
Angel Investors: Angel investors are typically high-net-worth individuals who provide financial backing to early-stage startups or entrepreneurs, generally in exchange for equity ownership in the company. They habitually invest in businesses that are risky or speculative for other investors in the startup funding scene, such as venture capitalists, and offer other benefits, such as mentorship, angel investment network opportunities, and strategic advice. Angel investors usually invest their own money and are again, willing to take on more risk in exchange for a potential reward.
Venture Capitalists: Venture investor capitalists are investors who offer to fund startup companies or early-stage businesses that have high growth potential but aren’t yet profitable. They like to invest in pioneering and disruptive companies in industries that have the potential to become successful and create massive returns.
Venture investor capitalists provide funding in exchange for an ownership stake in the company and could also help with guidance and support. They are also willing to take on higher levels of risk than other types of investors in the startup funding scene.
Pros of Working with Angel Investors
More flexible terms compared to VCs: Venture capitalist firms/companies may have a reputation of being somewhat ‘strict’ with their term sheets to some. Angel investors for startups are known to really be a part of the project they believe in. Angels and entrepreneurs work well together since angels have gone through the same process.
Can provide valuable industry expertise and mentorship: Angels and entrepreneurs may also provide more social connections together through angel investment network opportunities that can help brand a business.
Typically investing smaller amounts can help kickstart a business: Starting small can help you build a track record of success and attract greater investors down the line. By demonstrating that you can generate revenue and turn a profit via bootstrapping, you can show that your business is viable. Bootstrapped businesses or firms with small investment amounts create a good repo amongst investors.
Cons of working with angel investors
Limited funds and may not be able to provide additional funding: Entrepreneurs must know the limitations of angel investors for startups when looking for funding. If a business requires significant additional funding to grow and scale, it may be necessary to seek additional investment from other sources, such as large venture capital (VC) firms or another venture capital investor.
May have conflicting goals and interests with the entrepreneur: Since we know that angels may seem to be a bit more involved in the day-to-day runnings of the business than let’s say, a top venture capital firm, there might be a conflict in different ways to manage the company.
May lack the due diligence expertise and experience of venture capitalist firms/companies: Since venture capital is more of a ‘team sport,’ it involves a lot of different roles and responsibilities being carried out by different individuals, especially in top venture capital firms which may help be more efficient in due diligence as compared to one person. Although it is important to note here that most investors you see on angel investor websites/platforms have teams working under them to do backend work.
Pros of working with venture capitalists
Access to significant amounts of capital: Venture capital in entrepreneurship is filled with the largest venture capital (VC) firms sealing multi-billion dollar investments. You rarely find an individual making such deals on angel investor websites/platforms.
Strong track record of successfully scaling businesses: This is more often true for some of the more established firms, but usually most venture capital investors may have a better-looking portfolio at their particular stage of venture capital investing (Series A, B, etc.)
Well-equipped to provide ongoing support and guidance to entrepreneurs: This builds on the point previously made that VCs have teams doing specialized roles that can supplement a startup’s efforts.
Cons of working with venture capitalists
Often have stringent investment criteria and may require significant equity: VCs have a set of criteria that they use to evaluate investments, such as the size of the market, what stage of venture capital the firm is in, quality of the workforce, the USP, and the growth potential. If these boxes aren’t ticked, a VC may simply reject the proposition or else ask for a higher stake of equity for the risk taken in return.
Typically have a longer investment horizon: Since VCs invest in disruptive technologies, they understand that a business may take time to reach its full potential. Hence, the wait.
Can exert more control over the company and may have differing opinions on strategy: VCs have differing opinions on strategy since they come from different backgrounds and have different areas of expertise. Some may be more focused on short-term profitability, while others on long-term growth.
What It All Means
To sum up, angels are flexible on term sheets and are valuable assets to have on your team, but make sure that they have the same vision as you do and can provide the resources you need financially. VCs on the other hand, are more equipped because of their personnel and can invest massive amounts of money, but they do so on very stringent term sheets and could also have issues with your vision.‘How to get venture capital funding for your startup 101’involves founders and management teams being aware of these potential differences in opinion and control when seeking investment from both; angels and VCs, and judiciously considering the terms of any investment agreement to safeguard the level of control and involvement. If you’re still unsure about the two and you’re wondering how to get venture capital funding for your startup, call Marquee Equity at +1-213-600-7272 and we’ll help you secure the funding that you need.
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