Lesson 9: Angels vs VC VS Crowd Funding

Angel Investing vs. Venture Capital Investing vs. Crowd-Investing

Big differences exist between angel investing, venture capital investing, and crowd investing. To develop your strategy for fundraising, you need to know these differences and plan accordingly. The type of investing affects the expectations of your company, the influence that the investors have and the stage at which a certain type of investor is more willing to invest.

Angel Investing

Angel investors are usually individuals who provide financial resources to start-ups at an early stage. An “angel” makes his/her own investment decisions and often offers advice or insights to the start-up but is not involved in the running of the company. It isn’t their “job” to grow your company.  An angel investor doesn’t get a seat on your board either. In return for the money that he/she is investing in your company, he/she takes shares of your company for future financial returns.

An angel investor could be a wealthy person who is attracted to what your company is developing, or a group of wealthy people, or a friend of your family looking to help you get your start. They tend to make quick decisions because it’s just them. The investment in your company could be small or large – or anywhere in between. It’s usually considered seed funding, so you are not dealing with the large amounts that venture capital investors are putting in.

Venture Capital Investing

Venture capital (VC) is another level up from angel investing. It usually involves professional investors, board members, and people whose job it is to help your business grow. The money can come from many different sources, such as pension funds, corporations, foundations, or individuals. People who invest in venture capital funds are called “limited partners,” and the people who manage the fund and work with start-ups to make sure they are growing are called “general partners.”

Unlike angel investors, VCs have a say in the running of your business. They invest in your business because they see high growth potential, but they also expect a high return on investment (ROI). VCs expect to make much more than they initially invested. While angel investors typically don’t invest more than $1 million at any one time, a venture capital firm rarely invests less than $1 million. VCs make their money, after years, through an initial public offering (IPO) or selling the shares back to the owner. 

VCs usually invest in start-ups after the company has demonstrated a track record of success at some level. It takes time for VCs to do their research and due diligence on your company, so, unlike angels, decisions are not quick. While angel investors will invest at the start because they believe in your or your product idea, VCs want to see hard numbers and need evidence that they can trust you and your start-up. It adds pressure to you and your business, and you are allowing more people to come into your business to tinker with it. 

Crowd investing

Crowd investing is totally different from both angel investing and venture capital investing. In simple terms, crowd investing is when a large group of people online – the “crowd’ – invest in a start-up company, which sells “shares” of itself to these investors. Crowd investing opens the possibilities for people who are not professional investors or wealthy to invest large or small amounts in a private company at an early stage. Because of Title III of the JOBS Act of 2012, every American can invest in a start-up, as desired.  Online platforms for crowd investing make it easier for people to invest.

Unlike angels or VCs, the investors in crowd investing do not give advice to the company or get a seat on the board or help manage the company to develop. But they do get visibility into the company, including disclosure statements and project projections. They get shares of the start-up and then wait for years to see how the company performs. They are investing in the efforts of the start-up to do the wonderful thing they said they’d do to make money, launch an amazing product, and deliver positive financial returns to their investors.

Crowd investing is higher risk, but even the most conservative financial advisors recommend a diversified investment portfolio for people who invest, and crowd investing is increasingly seen as 5%-10% of a well-balanced, diversified portfolio. Investors are out there looking to invest in start-ups through online platforms that facilitate crowd investing.