As a founder, one of the most important activities you’d be engaging in to grow your business, and even spend months preparing for, would be funding. Per studies by TechCrunch, companies raise nearly three rounds before they get to Series A funding. And the two most common sources of funding in these rounds are angel investors and venture capitalists. How are the two different, and which one should you go for? Read along to find out.
What is venture capital?
Venture capital or VC funding is the type of investment where the capital is pooled from high net-worth individuals and institutional investors into various funds by VC firms and invested into high-potential startups. The entire process is managed by venture capitalists, who look out for brands that are mushrooming in certain industries to invest in. The below infographic shows how the venture capital industry works.
Venture capital funds are regulated by the Securities and Exchange Board of India (AIF) Regulations, 2012 (Alternative Investment Funds Regulations). These regulations apply to all pooled investment funds registered in India which received capital from Indian or foreign investors.
You can also download our curated list of the top 100 most active venture capital firms in India.
What is angel investing?
Angel investing is the type of funding where a wealthy individual, either alone or with syndication, invests in a high-risk, high-growth startup in exchange for a percentage of the equity in the business. Many angel investors are also part of business networks known as angel networks. According to SEBI, an angel investor (India) is an individual investor who has net tangible assets of at least two crore rupees, excluding the value of their principal residence, along with previous investing experience, or is a serial entrepreneur or has at least ten years of experience as a senior executive.
Recommended Read: Top 25 Angel Investors In India
How is an angel investor different from a venture capitalist?
While it is true that angel investors and venture capitalists have some factors in common, they cannot be used interchangeably. Some of the most prominent differences between angel investors and venture capitalists are as follows:
Angel investors are known to operate individually, investing their own money. On the other hand, venture capitalists invest the capital that has been pooled in from various high-net-worth individuals and is part of a company or a firm.
Angel investors ideally invest in a startup at its earliest stage, funding late-stage technical development and early market entry. In fact, the name ‘angel investors’ was coined because business angels tend to invest in businesses with minimal operational history. On the other hand, venture capitalists invest in early startups and mature businesses, depending on the firm’s focus.
This means angel investors take up more risk than venture capitalists. Venture capitalists take calculated risks and are comparatively less affected if an investment fails as they have a diversified portfolio with multiple investments. On the other hand, Angel investors have a lot to lose because they invest their own money into the business. Angel investors typically expect an average return of 20-25%, while venture capitalists expect anything from 25-30%.
Another major difference is in the amount that angel investors and venture capitalists are willing to invest in a business. While angel investors invest from $10k to a few million, venture capitalists invest from a few million to tens of millions. Because angels invest from their own pockets, they might not be able to finance the entire capital requirements of a business. However, when angels form a syndicate and pool in money, they can raise a substantially higher amount of capital.
While evaluating pitches, an angel investor would typically be more interested in the idea and the team behind it rather than the profit. On the other hand, a venture capitalist would be more inclined to assess the profit potential, the market fit, the demand for the product, etc.
When it comes to due diligence, angel investors are notorious for not doing it. While it has been a highly-debated concept, industry experts recommend spending at least 20 hours doing due diligence for angel investors. Venture capitalists, on the other hand, spend days, or even months, doing due diligence as there is a lot riding on the deal. The reason for the difference is that angel investors are investing their own money, while venture capitalists are investing the pooled money and are answerable to others.
Angel investors are usually ex-entrepreneurs or founders who are looking forward to giving back to the community. Venture capitalists are a mix of entrepreneurs and banking & finance folks who are investing with the sole aim of making profits.
It must be noted that there are some similarities between the two sources of funding. For starters, angel investors and venture capitalists both invest in businesses in exchange for percentage equity in the business. Additionally, they invest not only in terms of capital but also in terms of mentorship and networking. What they look for in a business is also the same: a solid team, scalable idea, achievable business plan, and high potential.
To sum it up, here’s how venture capitalists differ from angel investors:
|Differentiator||Angel Investors||Venture Capitalists|
|Style of operation||Individually or syndication||Part of a firm|
|Capital invested||Own money||Pooled money from investors|
|Investment stage||Early stage||Early stage to IPO|
|Risk appetite||High risk appetite||Lower risk appetite|
|Investment limit||$10k to a few million||Few million to tens of millions|
|What they look for||Great idea and solid team||Profit potential, market fit, demand, etc|
|Due diligence||Known for not doing due diligence||Spend months doing due diligence|
|Background||Ex-executive or founders||Entrepreneur sand banking & finance executives|
What is the most efficient and sustainable source of funding?
If you are looking for a flexible, highly scalable, 100% digital process of raising funds that require no equity dilution or any guarantee, we recommend revenue-based financing. This founder-friendly approach lets founders raise funds without diluting equity or providing collateral, and the repayments happen as a percentage of monthly revenue. You can learn more about revenue-based financing in our ultimate guide.
Being India’s largest revenue-based financier, Velocity provides founder-friendly revenue-based business loans to growing DTC businesses. If you are a D2C brand looking for funding to manage your inventory and marketing needs, apply here, and get funded within 7 days.