Angel Investor or Venture Capitalist? Experts Explain the Difference

Contributors: Silvia Mah of Stella Labs , Lauren Rowley of Stella Angels , Alicia Robb of Next Wave Impact and Barbara Clarke of The Impact Seat

If you’re an entrepreneur with an idea for a startup, chances are you’ve looked for partnerships to fund your new enterprise. And if you’re part of a VC firm you’ve doubtless seen founders you’d like to contribute to getting off the ground. Venture capitalism and angel investing both play important roles, which the following experts define, while pointing out the positive effect you can have as an angel investor.

What is an Angel Investor and How Are They Different from a Venture Capitalist?

When you boil it down to basics, an angel investor is investing their own money and a VC is investing other people's money, says Alicia Robb , founder of Next Wave Impact Network. “A VC raises a fund and, as a general partner, usually commits 1 percent of the total fund as an investment and the other 99 percent comes from other investors.”

Venture capital firms are structured differently than angels, says Barbara Clarke , president and founder of The Impact Seat. “VCs make money from management fees they charge and from a portion of the profits of the investments they select.”

It doesn’t mean that VCs don’t get involved. “Angel investors and venture capitalists both invest in early-stage companies, and they value their relationships with the founders in their portfolio,” says Silvia Mah, MBA, Ph.D. “Typically venture capitalists invest other people’s money who have invested in a specific fund, typically as LPs (limited partners).”

Later-stage companies are more likely to get venture capital, but investments could occur as early as the seed and Series A rounds, according to Lauren Rowley , MBA, director of investor relations for female-focused investment group Stella Angels . “Venture capital investments generally begin at $3 million and go up from there. As opposed to angels, who mentor, make introductions to people in their networks, and roll up their sleeves, venture capitalists have more resources and more influence over business strategy and operations.”

An accredited angel investor (with a specific net worth and other ~7 variations) needs to be a part of an angel group or syndicate; however, founders can accept funding from non-accredited and accredited investors, Mah says.

?Angel investors are usually high net worth individuals who invest in privately held companies, but not always. “Many angel investors invest relatively small amounts, so you might need to find a lot of investors,” Clarke explains. “There are ‘superangels’ who write larger checks, but they can be hard to find.”

What are the Advantages of Angel Investing?

Angels bring their networks and can make valuable introductions, Robb explains. “It's often that human capital that can be as important or even more important than the check they write!”

Some angel investors are excited entrepreneurs, while others may have made their money other ways, she adds. “It's great to find investors that have been through the scaling and exiting of a company because they have been there and done that and can help you avoid the mistakes they made along the way. It's also good to find investors that have sector expertise for similar reasons.”?

Many angel investors offer extensive mentoring, making introductions to people in their networks, and actively contribute to the success of their portfolio founders, Rowley says. “Angel investing is considered one of the riskier investments due to the high failure rate of early-stage ventures. As such, many angels hedge their bets by pouring time and talent into their portfolio companies to maximize the likelihood they would experience a successful exit. … Many angels earmark additional funds for follow-on rounds, often referred to as dry powder, which is usually triggered by having a great relationship with the founder and enthusiasm for their growth trajectory.”

How Do You Find Angel Investors?

“Most angels invest locally, so looking for angel groups in your area is a great way to start,” Robb suggests. “The Angel Capital Association is the largest membership organization of angel investors and angel groups in the United States, and they have a list of member groups on their website. It's also worth exploring events in your area that are part of the entrepreneurial ecosystem and meeting investors at those events. The best time to meet angel investors is BEFORE you need investment.”

Mah suggests becoming involved in the innovation community through pitch competitions, conferences such as Women’s Venture Summit taking place Sept. 17-18, 2021, startup events, panel discussions, and conversations about economic development. The most active and networked angel investors are often the judges in pitch competitions or panelists at events, so be mindful of the names of the speakers and judges.”

You will find most investors on LinkedIn or you can message them on Twitter, “referencing where you found out about them and ask for a 30-minute conversation,” Mah says. “Remember, it is a relationship-building marathon, not a sprint. … Angel investors are passionate about growing the startup ecosystem in their region, typically, and are interested in investing in tenacious founders, so a relationship with the founder is of primal importance.”

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