It’s no secret that investors are always looking for the next big thing. Whether it’s a new company or technology, they want to be on the ground floor and reap the rewards when it takes off. This is where angel investing and venture capital come in.
Angel investors invest their money in start-ups, usually in exchange for equity. They take on more risk than traditional investors but can also make much more money if the company succeeds.
On the other hand, venture capitalists pool together money from different investors and invest it in early-stage companies. They tend to be more hands-off than angel investors, but they can provide more resources to help a company grow.
How Angel and VC relate
Many people see angel investing and venture capital as two sides of the same coin. Both involve taking a risk on a young company, and both can potentially give you a significant return on your investment.
The critical difference is that angel investors are betting on the founder, while venture capitalists are betting on the business. Angel investors tend to invest smaller amounts of money than VCs and are more likely to be involved in the company’s day-to-day operations.
This is because angels invest in the very early stages of a company when the founder is still trying to figure out the business. They’re more likely to invest in a company because they believe in the founder’s vision rather than because they think the business will be successful.
VCs, on the other hand, usually invest later on in a company’s life cycle. They tend to put more money into companies they think have a good chance of becoming profitable.
This doesn’t mean VCs don’t care about the founder’s vision. But they’re more likely to invest in companies with a clear path to profitability rather than those relying on intangibles like the strength of the founder’s relationships or their ability to execute their vision.
Because of this, there are around 300,000 angel investors in the US, compared to fewer than 2,000 VC firms. According to a study by the University of New Hampshire, the average angel deal size in 2020 was $392,025, for 9.6% equity with a deal valuation of $4.1 million. That said, angel deals can be much smaller—even just $15,000 from friends and family.
On the other hand, VC rounds range from a median of $10 million in Series A to mega billion-dollar rounds at later, pre-IPO stages.
How Angel and VC work together in a portfolio
Many investors choose to invest in both angels and VCs. This can be an excellent way to diversify your portfolio and expose you to different stages of a company’s life cycle.
If you’re investing in VCs, you usually invest in later-stage companies with a higher chance of success. But this also means you’re missing out on the potential upside of investing in a new start-up.
Angel investing can give you access to start-ups that might not be able to get funding from VCs. And because you’re investing in the very early stages of a company, you can make a much larger return if the company is successful.
Of course, there’s also more risk involved with angel investing. You could end up losing your entire investment if the company fails. But for many investors, the potential rewards are worth the risk.
Why Invest in Both Angels and VCs?
There are a few reasons why it makes sense to invest in both angels and VCs:
- Diversification – By investing in both, you’ll be diversified across different types of companies and different stages of their life cycles. This can help reduce your overall risk.
- Potential Upside – As an early-stage investor, you can make a much larger return on your investment if the company is successful.
- Access to Start-Ups – Many start-ups have difficulty getting funding from VCs. By investing in angels, you’ll have access to these companies.
Of course, some risks are also to consider before investing in angels or VCs. But for many investors, the potential rewards outweigh the risks.
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