The Difference between Angel Investors and Venture Capitalists

I have been doing some optimization jobs for entrepreneurs and investors’ website, but I do not have a full knowledge on what the business is really all about. All I know is that, this is about business investment, yet, I still can not figure out how it goes, and how it works. Until I made a little research, I completely understood on what type of business this website is offering.

I admit this is the first time I have encountered the words Angel Investor and Venture Capital. From my own point of view, without having knowledge yet of what an Angel Investor means, I thought it is an individual who seems like an angel lending his money to those who need capital for investment. And perhaps some necessary procedures must be followed and legal documents must be secured for this is a financial matter that is always a very sensitive case in regards to business.

According to Wikipedia, an Angel Investor is also known as business angel or informal investor, an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. The term Angel originally comes from Broadway that was used to describe wealthy individuals who provided money for theatrical productions. http://en.wikipedia.org/wiki/Angel_investor

My own perception was not quite far from what Wikipedia has explained. So, Angel Investors typically invest their own fund. These opulent individuals organize themselves to share research and merge their own investment capital. Most of these investors are retired entrepreneurs or executives, who may be interested in angel investing for some reasons that go beyond monetary return, such as being  acquainted with the latest developments in the business sector, and mentoring another generation of entrepreneurs by making use of their experience and networks on a less than full-time basis.

According to a Harvard report (by William R. Kerr, Josh Lerner, and Antoinette Schoar), start-up companies funded by Angel Investors are less likely to fail than those companies who rely on other forms of initial financing.

Venture Capitalists on the other hand, contrive the merged money of others in a professionally-managed fund. It is a capital provided to early-stage, high potential, growth start-up companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT, software, etc. http://en.wikipedia.org/wiki/Venture_capital

 

For new companies with limited operating history and are too small to raise capital in the public markets, Venture Capital is very much appealing. Basically, these small companies have not yet reached the point where they are able to obtain a bank loan or complete a debt offering. Investing in small and less mature companies is risky for Venture Capitalists and so they usually get considerable control over company’s decisions, apart from owning a significant portion of the company.