Angel investing vs Venture capitalist

More and more often we come across such headlines in the business media: “The startup raised another round of investments”, “the company attracted angel investments at the pre-seed stage”, “the startup passed the seed round in the accelerator”, etc. However, entrepreneurs and investors who are not involved in the venture business do not fully understand what this round is and at what stage of development the business is. Sometimes even people from among startups get confused in a complex system of attracting investments.

Angel investing vs Venture capitalist: What is Angel Investing?

Business angels are individuals who invest their personal funds in young startups in anticipation of their growth in value. At the initial stage of development, banks generally refuse loans to companies, and business angels have both the means and the desire to help such companies in exchange for a share.

Business angels can be top managers of large companies and business owners who do not mind losing the conditional $ 10 000 if the startup does not take off.

Business angels can invest in companies on their own behalf or on behalf of their company. They actively participate in the development of the company, share their experience and lead the company to create an MVP (minimum viable product version).

The three most famous business angels are Fabrizio Grinda (invested in more than 200 startups, was among the first investors in Alibaba),  Paul Buckheit (more than 135 investments in startups), and Wei Guo, who invested in 129 startups.

Angel investing vs Venture capitalist: Who is a Venture capitalist?

Venture capital is money from investment funds or companies to develop startups at the earliest stages. The venture investor receives a stake in the share capital of the company. Often venture capitalists invest money in startups at the level of an idea, if it seems promising to them, hoping for big profits in the future.

A feature of venture capital investments is a high degree of risk. Statistically, 90% of startups don’t take off. However, the profit from one successful trade can cover losses from dozens of failures.

The main challenge for a venture capitalist is to find a company that could become the next Facebook or Amazon in the future. A company from a small startup will grow into a large corporation, and an investor investing a conditional $ 10 thousand, as a result, can earn $ 1 million. Therefore, venture capital investments are the most profitable, but also the riskiest.

Typically, the term of venture investment is 7-10 years. After that, the investor sells his stake in the company on the stock exchange or to a strategic buyer.

Most investment funds operate in the homeland of venture capital investments – the United States. There are about 1000 venture capital funds operating here, most of them are concentrated in Silicon Valley. The most famous are Andersen Horowitz, Sequoia Capital and Accel Partners.

And now let’s talk about the role of investments on the time-line of startups. We have described the startup stages in our previous article Stages of Startup Funding and now we will just touch on the investment part of each stage.

Seed round

This round of investment is divided into two stages – pre-seed, seed, post-seed. They differ in the amounts that can be raised at these stages.

Pre-seed investments are for companies that have confirmation of potential customer interest but may not yet have a product. The main investors at this stage are the founders themselves and business angels. Another source of funding at this stage can be various programs – grants from the state, international organizations, competitions (hackathons).

In the United States, the average investment check at the pre-Seed level is $ 250 thousand.

Seed investments attract teams that already have a product and first customers. After receiving the money, the main task of the team is to scale the sales of the main product. At this stage, the key players are business angels, seed funds and accelerators.

In the United States, the average check at the Seed stage ranges from $ 500,000 to $ 3 million.

Sometimes companies can raise investments in this round several times. This is called a series seed. It happens that for startups that have raised the seed round, the late seeding stage (post-seed) begins. This happens when the company does not have enough time to test the underlying hypotheses and generate a revenue stream. Most often, at this stage, previous contributors invest in a startup.

Round A Investment

Most often, when they write that a company has raised a round of investments, it is about Round A. At this stage, money is received by already stable companies that have developed their final product and learned how to sell it to the end consumer.

The main task of the A-round team is to optimize the user base and scale the product to other market segments and regions. It is at this stage that professional venture capital funds come into play.

In the United States, investments in Round A range from $ 2 million to $ 15 million.

Growth rounds (B, C, D)

At these stages, large funds are invested in the company, ready to invest tens of millions of dollars. For this, the company must achieve certain development indicators.

During round B, the company scales up, its income increases, it occupies its own niche in the market. In round C, the company increases its shares in the business and begins to make a profit. It is during this round that the company becomes profitable and capable of independent development without outside support. Many companies remain at this stage, and only a few reach round D, which provides for the preparation of the company for an IPO or for sale to a strategic investor.

Angel investing vs Venture capitalist: how to attract investment to your startup?

Any investor – a business angel or a large venture capital fund – expects first and foremost to benefit from their investment, rather than save the world.

Therefore, before investing money in a startup, an investor studies it. First of all, he pays attention to the following factors:

  • the size of the target market (the more global the potential market of the project, the better);
  • experience and expertise of the project founders in the subject area;
  • the presence of potential customers;
  • a clear business plan that justifies all necessary expenses;
  • risks that may arise.

Sometimes at the initial stages of a project, investments can be given for an idea if it seems interesting to the investor. In this case, two factors are important for the investor – the potential product and the team that is working on it.