Investment comes in all shapes and sizes.
However, there are two kinds of investment that stand out from the rest: angel investment, and venture capital investment. There are a few differences that set the two apart and make them more suited for a business depending on what the business is looking for and what stage they are in at the time. Read on to learn more about each.
What is an angel investor?
An angel investor is someone who puts their own finance into the growth of a small business at an early stage. They may also potentially contribute their advice and business experience. Angel investors can be wealthy, well-connected individuals who have taken a personal liking to a business, a group of angel investors who fund startups together, or even someone who has decided to contribute some money to help out a friend or family member. Generally, unlike venture capitalists, angel investors have motivations other than high returns on investment–to help less experienced businesses within their sector, for example.
Angel investors make their own decisions about the investments they are willing to make, and in return for providing personal equity, take shares in the business. The amount they invest is flexible – it could be a small amount just to get the company started, or a larger amount. As well, while they can provide valuable insight, advice, and business connections to the business owner, their job is not to run or micromanage the company. As a result, angel investors will have equity in the business but will not usually have a seat on the board.
What is venture capital?
Venture capital funding is much different. Rather than individual investors, venture capital usually involves a whole firm made up of professional investors, board members, and industry experts. Their money comes from a variety of sources, including both corporations and individuals.
The job of venture capital firms is to find businesses with high growth potential and, through having a firm share and say in the future of the company and its running, receive a high return on investment in exchange. While angel investors specialise in early-stage businesses, venture capital firms are generally more unwilling to invest in startups unless they show compelling promise and growth potential. In contrast to angel investment, agreeing to venture capital investment means committing to bringing more people into your company, people who have a say in how it is run and whose job is to help your business reach its potential.
After investing for a period of time, often years, the venture capitalists sell the shares in the company back to the owners, to other companies or investors, or through an initial public offering, hoping to make more than what they initially put in and profit.
In conclusion, there are benefits to each of these funding types. Choosing one over the other simply depends on the growth stage of a company at the time, and what kind of involvement the business owner is comfortable with, among other things. As in all important business decisions, it is advisable to conduct adequate research before committing to your choice.
Esther Chen is currently employed by Gedcor as a Junior Technical Writer. She is pursuing her BFA in Creative Writing at the University of British Columbia.