Venture Capitalists Vs Angel Investors: Debate Of The Startup World!
In the modern era, businesses are ever-evolving, and so are their financial needs. However, procuring finance only from financial institutions or going public may be accompanied by several stringent norms. It can further hinder the functioning of the business. Owing to this, modern financial solutions through private financing have gained popularity in recent times. Products like Alternative Investment Funds (AIFs) have catalysed this growth. Category I of AIFs offers investments for early-stage ventures and startups.
As of June 2024, Venture Capital Fund (VCF) and VCF angel funds have raised nearly INR 27,423 crores and INR 4,123 crores, respectively, through AIFs1. However, investors usually confuse the functions of venture capitalists and angel investors. Let us explore their actual nature and differences in detail.
What Are Venture Capital Funds?
The pool of professionally managed funds offers investments through private equity to startups and early-age firms. They seek high-potential firms, which require financing. The investments are highly risky, owing to the growth stage of these firms in which venture capital funds invest.
Method Of Venture Capital Funding
The working of venture capital firms is somewhat similar to that of mutual funds. They pool the money from various investors and invest. Early-stage ventures and startups may find it difficult to procure funds from regular sources. This is primarily due to the lack of historical records and questions about the viability of the potential market.
This gap is filled by venture capital firms. They assess the potential ventures/startups, gauge their growth prospects and invest the pooled money in them. These are highly risky investments. The projects may fail owing to market vulnerability. However, if they succeed in establishing their markets, the investments may be bestowed with unprecedented growth.
Suitable Moment For Partnership With Venture Capital
Partnering with a VC firm means taking their help in the growth of a startup or an early-stage venture. Venture capital funding can be a viable source for such organisations. Moreover, the partnership would include not only funding but also taking their help in the form of business expertise, networking and other aspects.
Deciding whether to partner with a VC firm depends on the aspirations, current requirements, market conditions, and other suitability of a business. One can make this decision after analysing the pros and cons of VC firms.
Who Are Angel Investors?
The functions of VC and angel investors are usually confused by the investors. They both have a keen association with startup funding. However, there is a thin line of difference between the two.
Angel investors are experienced High Net-Worth Individuals (HNWIs), entrepreneurs or experts who invest a significant amount in early-age ventures. They provide the required push to ventures. Moreover, such individuals are usually the ones with entrepreneurial or senior management experience. Therefore, their expertise may also help entities grow in the longer run.
These days, the concept of angel funds is also popular. Several angel investors invest in this pool, and the fund offers them units in exchange. Such angel funds are categorised under the venture capital fund in AIF regulations.
When Should I Go To Angel Investors?
Seeking angel financing is a strategic move due to the expertise of these individuals. Therefore, procuring funds from angel investors can be done after considering the following aspects:
- Capital requirements
- The growth stage of the company
- Product development or market expansion
- Seed funding stage
- Industry and investor networks
Angel Investors Financing
Against the funds invested by angel investors, equity or debt units are provided by the company. The private equity offered by entities to the investors is accompanied by fractional ownership. The debt investments by the angel investors provide them with fixed income and principal payback at the time of redemption.
Venture Capitalist Vs. Angel Investor
Point of Difference | Angel Investors | Venture Capitals |
Meaning | These are HNWIs investing in early-age ventures. | VC funds are professional entities that invest in such ventures. |
Investment Size | Small investment, compared to VCs, as a single investor. | It pools money from different individuals, which creates a potential investment size. |
Involvement | They may provide mentorship and support along with the fund. | These may also have similar support, but their involvement may be restricted to an extent. |
Exit Strategy | They may not have a fixed exit strategy and can wait for returns. | Their investments are pooled, and this responsibility makes them plan timely exits from investments. |
Example | Some famous angel investors are Anupam Mittal, Balaji Srinivasan and Alexis Ohanian. | Some famous VC firms are Tiger Global Management, Blume Ventures and Accel India. |
Angel Financing Vs Venture Capital Funding: Which Is Feasible?
Selecting the best among these financing options is preceded by analysing the business objectives.
Startups willing to procure funding should first know the difference between venture capital and angel investors. It will help them analyse their requirements and the growth stage of their venture. The pros and cons of VC and angel investors are as follows:
Particulars | Angel Investors | Venture Capitals |
Pros | They have experience in the industry or sector in which they are investing and can provide valuable guidance and mentorship to startups. They typically have a long-term view of their investments and are willing to be patient as startups grow and develop. This can be beneficial for startups that may need time to refine their business models or build out their teams. | Venture capitalists have extensive networks and can provide startups with valuable connections and resources. They are often experienced investors who can provide startups with guidance and advice on how to scale their businesses effectively |
Cons | Angel investors often take a significant equity stake in the startups. They may have different goals and objectives than the founders, which may create hindrance in functioning. | They have high expectations for growth and profitability, which can lead to pressure on the founders to prioritise short-term gains over long-term sustainability. They often have a strict timeline for exit, which can lead to pressure on the founders to sell the company or go public before it is fully ready.
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Conclusion
Venture capital firms play a crucial role in pooling a large investment and providing it to startups. Angel investors may have significant expertise but less investment corpus compared to VCs. Understanding the VC and angel investors difference can help entrepreneurs plan efficiently for their required funding opportunities.
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References
1. SEBI, Accessed from https://www.sebi.gov.in/statistics/1392982252002.html.
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