Making Your Pitch: Angel Investors Vs. Venture Capitalists

It's not easy finding funding for your start-up business. But a liquid capital source is a must if you want to grow your dream business. If you've reached a concrete place with your business or have a firm business plan and are ready to take it to a new level, you'll be able to approach either an angel investor or venture capitalist.

But you can't win an investor over just by asking them to fund your venture. You have to make your pitch.

Angel Investors vs. Venture Capitalists

Angel investors and venture capitalists both invest money into businesses, especially start-ups. This is about the only thing they have in common. When it comes to how they invest and their intentions, their practices differ greatly. Spotting these differences will help you choose your investor, save you from confusing moves by your investor, and cater your pitch to how they operate.

The Money they Invest

One of the significant differences between an angel investor vs. a venture capitalist is the money they use to invest in a business.

An angel investor is an accredited investor whose annual income is at least $200,000 and a net worth of more than $1 million. Venture capitalists, on the other hand, invest in small businesses with money that's not theirs. Venture capitalists pool investment funds from pension funds, investment firms, and larger corporations.

The terms for a business loan from angel investors may be more reasonable than those of a venture capitalist. This is because angel investors are more focused on helping a small business build a foundation for growth rather than instant profits.

The Stage at Which They Invest

You will determine the spin of your pitch to an angel investor or venture capitalist by what stage of growth your business is in.

An angel investor will be more interested in investing in a start-up business, while venture capitalists prefer established enterprises with reduced risks. Angel investors want to see a small business become profitable even though there's no proof that it will be successful. They choose businesses for long-term potential and tend to take more risks, unlike their venture capitalist counterparts.

Amount of Invested Capital

The amount of business capital that angel investors and venture capitalists are willing to offer also differs.

An angel investor will make an average investment of $330,000, according to the Small Business Administration (SBA). On the other hand, a venture capitalist can make a business capital deal that amounts to an average of $11.7 million.

Make your pitch to venture capitalists if you are looking for millions in capital or approach an angel investor if your business only requires thousands.

Return on Investment Expectations

There are differences in the return on investment (ROI) that angel investors and venture capitalists expect to receive. In general, a venture capitalist is going to expect a higher percentage of return. Whereas an angel investor may be looking to recoup between 20-25% of their investment, a venture capitalist expects between 25- 35%.

Their Roles in the Invested Business

Both angel investors and venture capitalists will play active roles in your business to safeguard high ROIs.

Angel investors will act as mentors for your small start-up, offering suggestions on its day-to-day operations. These mentors will help connect you to competent accountants, legal practitioners, or banks while assisting with any business decisions.

Venture capitalists are not interested in mentoring your business, although it may vary with the firm you're engaged in. Most venture capitalists require that you form a board of directors for your company where they will occupy a seat.

How to Select Your Investor

Choosing an angel investor or venture capitalist is a personal decision for the business owner. Give yourself time to consider how a potential investor fits in with your business and how your business fits in with the investor.

Pitching to Angel Investors

Angel investors are a proper choice if you have a small business or a start-up. They offer better investment terms and can extend gratuity, especially when they want to see your small business succeed. Because it's their own money, angel investors are more open to ideas than a rapid scale.

Angel investors can be friends and family when your start-up or fledgling business is at its early stages. Angel investor funding usually revolves around people who care about you instead of those looking for big business ideas.

The investment you can expect from angels is small. When you are ready to take more risk or scale up faster, approach venture capitalists.

Pitching to Venture Capitalists

Venture capitalists are essentially looking to invest in the optimal winning percentages of firms that capture a large industry. A venture capitalist is interested in the unicorn, rare start-ups with values running into one billion dollars.

When considering a venture capitalist, focus on what the investor is seeking in terms of team, product, and market. Target their interests and show them that your business can be beneficial to them instead of seeking charity. Pitch to venture capitalists when you have confidence in your market, have a stand-out product, and a killer team at the head of your business.

Conclusion

With so many e-commerce and tech start-ups nowadays, angel investors and venture capitalists may seem all too similar to each other. There are still fundamental differences, however, when looking at these investors side-by-side.

Venture capitalists may have deeper pockets than angel investors, but they are essentially using other people's money. Angels will use their own money in most instances, meaning they can exercise greater flexibility without accountability.