THE DREAM IN ACTION

As I continue on my quest to better understand venture capital the question arises of, what is the difference between angel investing and venture capital? I’ve found there are many; involvement, who’s money, what stage, what size, required performance post investment, type of person, etc. The differences are practically endless so I’ll try to address the basics here.

First, Angels are investing their own money, they are usually individuals not private entities, although there are a decent amount of angel networks that pool money for these types on investments. Angels typically get involved much early in the start-up process and for better or worse their investment decision is much more emotionally charged. Because of that emotional involvement the angel is usually much more involved in the growth process.

Venture capitalist are an entirely different beast. The perceptions of VC’s varies quite a bit amongst the start-uppers and entrepreneurs who often seek there help/money. The term “vulture capitalist” is not uncommon and is used for VC’s who take all control away from the entrepreneur who is building the company. Different from Angels, VC’s are investing someone else’s money and get paid a mgmt fee (around 2.5% of the total fund) and also get carry (a piece of the upside gains, around 20%). A VC’s performance is measure by the investor or LP (limited partner) and a VC is successful by picking long shots and helping them “make it”. Venture capital investments usually come at later stages that Angel investments and VC’s look for “exits” or profitable outcomes usually in the form of an IPO or acquisition. These events can usually return 5-10x on investment (or higher) for big pay-offs.

However, when it comes down to it, both Angels and VC’s are looking for extremely high returns because the investments they make are extremely risky. For VC’s this is a job and for Angels, it is an opportunity to be involved with a success story and entrepreneurs should realize and acknowledge it.

*The image above was taken from the 2008 Risk Capital Report: Wisonsin prepared by Dr. David J Ward.