Angel Investors vs VCs: Pros & Cons
Last updated: 2021-05-26 (originally published on 2019-06-10) — by Rae Steinbach
Do you have an idea for a business? If so, you’ll need capital to transform your vision into a reality.
There are many options to consider when seeking funding for your small business. One is to look for investors. If someone believes in your idea, they may be willing to invest in it in exchange for equity in the company.
Such individuals are known as angel investors. However, they aren’t the only parties that could potentially invest in your business. You might also consider seeking funding from venture capital firms, or VCs. These are businesses devoted to investing in startups.
You may be wondering, “Which is the best option?” It’s important to understand that there’s no right answer for everyone. You need to consider the pros and cons of each before making a decision for your business.
Specifically, keep the following points in mind:
Pros & Cons of Angel Investors
Angel investors have access to substantial capital, which they invest in business ideas they believe will succeed. Coming to an agreement with such an investor can thus offer benefits that extend beyond simple business financing.
A smart angel considers their investment opportunities carefully. If one chooses to fund your business, it’s a good sign they feel strongly about its potential. That means you have someone on your side who may be as passionate about this venture as you are.
This often makes it easier to forge connections in your chosen industry. After all, angel investors have a financial interest in your success. They frequently choose to invest in businesses they can actively help grow. If an angel comes across an entrepreneur looking to start a business in a sector they’re familiar with, they’ll be more comfortable making an investment, knowing they can introduce said entrepreneur to other important industry figures.
However, you have to remember that an angel investor is still an individual person. The amount of money they can justifiably invest is somewhat limited compared to other options.
Pros & Cons of Venture Capitalists
Venture capitalist firms aren’t individuals. They’re entities that consist of numerous professional investors, board members, executives, business management specialists, and more. Additionally, the money they invest comes from a wide range of sources.
This means they have greater capital to invest in your business than angel investors do. That’s the main benefit they offer. On top of that, because they specialise in helping businesses succeed, venture capitalists can offer valuable resources and guidance.
That doesn’t mean there aren’t downsides to working with VCs. Again, angels choose to invest in your business because they are passionate about it. As a result, they are often more willing to remain loyal if they don’t see immediate returns.
VCs, on the other hand, make investments with the primary goal of making a profit for their firm. This means they are more aggressive about demanding results. Because of this, VCs often take on enough equity in companies to play major roles in their growth. If their ownership share exceeds 50%, VCs can even get rid of the company’s founders. It helps to carefully determine how much money you need to raise to avoid giving away too much of your company in order to justify larger investments.
These are all factors you need to consider when deciding where to seek investments. Do you want the benefit of major funding, in exchange for less control over your business, or can you accept less capital in exchange for more freedom? Answering these questions honestly is key to making the right decision for your business goals.
Rae Steinbach is a graduate of Tufts University with a combined International Relations and Chinese degree. After spending time living and working abroad in China, she returned to NYC to pursue her career and continue curating quality content. Rae is passionate about travel, food, and writing.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.