Venture capitalists, as we mentioned in a previous article, are typically part of a larger investment firm utilizing a large pool of capital to take investment risks on start-up companies or those seeking to expand in the market. These individuals are often protected by their firms which, as a result, take larger hits when investments turn south and, vice versa when investments are successful. Venture capitalist firms can vary in size and knowledge, often providing a diverse range of industry experience with a focus on business management and marketing, networking and portfolio management.
Venture capitalists often take the reins of start-up companies and expansion initiatives to effectively oversee and engage in market opportunities with potential benefit. From portfolio management to earning further investments, venture capitalists work diligently to establish opportunities that will yield substantial returns.
As with all risk, reward is never guaranteed and, as a result, the failures of venture capitalists can be quite high, leading to extensive loss of investment. However, in success, the rewards and returns can easily reach from 300% to 1000% based on the investment expertise and industry experience of market-savvy venture capitalists.
In contrast to venture capitalists who are usually protected by a larger firm, an angel investor is typically someone with a very high net-worth seeking to invest in start-up companies in exchange for an equity share. The money invested belongs solely to the individual and is often negotiated in exchange for a previously agreed upon share or stock.
Angel investors are, more often than not, former entrepreneurs who achieved success in their companies and are currently looking to help others see their ideas to fruition while having the potential to generate great financial returns. Through catalyzing economic growth, angel investors establish a win-win situation for entrepreneurs to grow their business while providing the needed funds and valuable industry insight. Typically, angel investors fund companies within their local regional market or, on a rarer occasion, will invest in companies with a larger geographical scope if other local investors are known, trustworthy and involved.
Again, as with all risk, there is a balance between reward and loss. In 2008 alone, angel investors contributed $19 billion in over 55,000 startup companies, which shows their commitment to entrepreneurialism as well as the market, industry and investment opportunity.
Although angel investors contribute money of their own, they often collaborate in what is commonly referred to as an “angel group,” in which they collectively invest in entrepreneurial firms. These groups meet to review business proposals, listen to entrepreneurial presentations, collaborate on potential investments, and validate plans and finances of affirmed investment opportunities. Groups vary in size and specialty, ranging from large groups to those specializing in specific industries such as software or medical devices.
Each inventor wants to see his idea or product achieve great success from the conception to launching into the market. This process and success is made easier with the help of investors, two of which are venture capitalists and angel investors. While both invest in start-up companies and those seeking to expand their market reach, there are specific differences that each investor brings to the table.
• Angels invest their privately held funds whereas venture capitalists invest funds from external sources that range from their firms, pension funds, foundations, etc.
• Additionally, despite many exceptions, angel investors often seek to invest in the early stages of the entrepreneurial process, commonly known as the seed or start-up stages. In contrast, venture capitalists typically provide later investment once the product or service has been further established.
• Investment size is also a distinguishing factor between venture capitalists and angel investors. Because of their market reach and affiliations, venture capitalists often make investments of $2 million or more to provide comprehensive financing. Angel investors, however, generally contribute anywhere from $1,000 to $100,000 as their investment is solely reflective of their personal financial situation.
As with any part of the invention process, research is vital in deciding the best approach to investment. Before pitching your invention to either a venture capitalist or an angel investor, do your research and know which investor your idea or service will have greater appeal or engagement. Take into account the industry of your invention and the industry of the investors you are approaching. Remember that someone familiar with your industry often provides a greater chance of success in addition to valuable industry insight and marketing knowledge.
Above all else, know your product or service as well as your needs of investment. Determine the most appropriate funding source so that you will not only save time and money but so that you will establish a practical and achievable path to gain success in launching your product into the market.