Venture Capitalist vs Investor: Everything You Need to Know
One difference between a venture capitalist vs investor is that a venture capitalist forms a limited partnership.3 min read
One difference between a venture capitalist vs investor is that a venture capitalist forms a limited partnership. By doing so, the limited partners are the investors in a venture capital fund instead of outside investors. Other differences deal with when and how much is invested.
About Angel Investors
An angel investor is an individual or individuals who use their own money to fund a small business. This may take place in the early stages of a business startup where the angel investor also provides business advice.
Angel investors are generally people who have a net worth of $1 million or more, excluding their home. In lieu of the $1 million, an angel investor may have an annual income of $200,000 ($300,000 for married couples). The dollar amount is expected to be a continuous flow of income for the future.
When investing as individuals, the range of personal money invested falls between $25,000 and $100,000. These figures are the general area of investment, but there are other ventures that can run more or less than these figures. A goal of angel investors is to group as many investors together as possible to form a syndicate into a single investment operation that averages $750,000 or more.
There are several advantages to working with angel investment groups:
- More angel investment groups are being formed.
- Availability of funding to companies is on the rise.
- Funding is quicker. Usually, the same terms as venture capitalist funding are available.
- Angel investors generally invest in the early stages of a company. It is common for angel investors to fund a company's early entry into the market and into the last stage involving technical development.
- Angel investors do not rely on anyone else when it comes to making decisions.
Note that angel investors do not like to invest when they are presented with ideas only. They prefer to be involved with a prototype of a product or a beta version. Receiving investments from angel investors usually involves more due diligence than what is done when an individual is involved. This process may be as simple as meeting with the entrepreneur for lunch or having a thorough background check conducted by professionals.
About Venture Capitalists
On average, a venture capitalist may invest $7 million in a company. The focus of venture capital firms is finding businesses that are showing the potential for high growth. The general partner of a limited partnership may also be the fund manager. The general partner's job is to find the best deals and invest in those that show the most promise of a monetary return to the limited partners.
Venture capitalists support the growth of a company until it goes public or is acquired. This means larger investments as the company moves forward. Venture capitalists will incorporate a "Series A" investment that is designed to guide the company through the stages of rapid growth to quickly increase its market share.
Due diligence is an important step for venture capitalists because of their fiduciary obligation to the limited partners. A fee of $50,000 or more is standard to have thorough research conducted into investment prospects. Because more than one person is involved in a venture capitalist investment, a committee is formed to make decisions. This is to ensure the decision is objective and not at the discretion of one person.
About Investment Bankers
Companies looking for funding also use investment banks. These banks work as intermediaries to assist companies in raising capital. A company will often time hire an investment bank for help with things like finding investors, dealing with regulatory issues, and executing the IPO when the company is going public.
The primary difference between venture capitalists and investment banks is a venture capitalist firm generally invests directly in the company whereas an investment bank tends to deal more with financial transactions associated with the company. Another difference between venture capitalists and investment banks has to do with the type of customer. Venture capitalists target startup companies with lots of potential while investment banks prefer to work with established firms that have already grown to the point where they can access global capital markets.
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