How Do Venture Capitalists and Angel Investors Differ?
Small businesses and emerging businesses in new industries usually receive venture capital from high-net-worth individuals (HNWIs), commonly referred to as angel investors and venture capital firms. The National Venture Capital Association is an entity made up of numerous venture capital firms that provide funding for innovative enterprises. Angel investors are often a varied group of individuals who have accumulated their wealth through different sources, but they are typically entrepreneurs or recently retired executives from their business ventures.
Investors who provide venture capital and have made their wealth typically possess certain key characteristics. These investors are usually inclined to invest in well-managed businesses that have a fully developed business plan and are poised for significant growth. Additionally, they are more likely to offer funding to ventures that operate in the same or similar industries or business sectors with which they are familiar. In case they do not have work experience in that field, they may have received academic training in it. Another common occurrence among angel investors is co-investing, in which one angel investor funds a venture alongside a trusted friend or associate, often another angel investor.
The Venture Capital Procedure
The first step for every startup seeking venture capital is to submit a business plan to either a venture capital firm or an angel investor. If the firm or investor is interested in the proposal, they must do due diligence, which involves an in-depth examination of the company’s business strategy, products, management, and operational history, among other things.
Because venture capital tends to spend bigger sums on fewer businesses, this background research is critical. Many venture capitalists have prior investment expertise, typically as equities research analysts, while others hold a Master of Business Administration (MBA) degree. VC professionals also prefer to focus on certain industries. A venture capitalist specializing in healthcare, for example, may have previously worked as a healthcare analyst.
After completing due diligence, a firm or investor will commit to making a capital investment in exchange for company stock. Capital is usually offered in rounds rather than all at once. The firm or investor then becomes involved in the startup, providing advice and evaluating its development before releasing additional capital. The investor typically exits the firm after a set length of time, usually four to six years after the initial investment, through a merger, acquisition, or initial public offering (IPO).
A Day in the Venture Capital Life
Venture capitalists, like most professionals in the financial industry, usually begin their day by reading The Wall Street Journal, Financial Times, and other respected business publications. Venture capitalists who specialize in a particular industry often also subscribe to trade journals and papers specific to that industry. They usually read all of this information while having breakfast.
Meetings fill most of the day for VC professionals. These meetings include a wide range of participants, such as other partners or members of their venture capital firm, executives in an existing portfolio company, contacts within the field of specialty, and budding entrepreneurs looking for venture capital.
In an early morning meeting, for instance, there could be a firm-wide discussion about potential portfolio investments. The due diligence team will present the pros and cons of investing in the company. A vote may be scheduled around the table for the next day on whether or not to add the company to the portfolio.
In the afternoon, a meeting may be held with a current portfolio company. These visits are held regularly to determine how smoothly the company is running and whether the investment made by the VC firm is being utilized wisely. The venture capitalist is responsible for taking evaluative notes during and after the meeting and circulating the conclusions among the rest of the firm.
After spending most of the afternoon writing up that report and reviewing other market news, there may be an early dinner meeting with a group of budding entrepreneurs who are seeking funding for their venture. The venture capital professional gets a sense of what type of potential the emerging company has and determines whether further meetings with the venture capital firm are warranted.
After that dinner meeting, when the venture capitalist finally heads home for the night, they may take along the due diligence report on the company that will be voted on the next day, taking one more chance to review all the essential facts and figures before the morning meeting.
Venture Capital Trends
The very first funding from venture capitalists was intended to kickstart an industry. To achieve this objective, Georges Doriot adopted a mindset of taking an active role in the startup’s progress. He offered financing, guidance, and connections to entrepreneurs.
In 1958, the SBIC Act was amended, allowing more new investors to enter small firms and startups. As financing levels for the industry increased, so did the number of bankrupt small firms.
Over time, VC industry players have rallied around Doriot’s initial notion of offering advice and support to entrepreneurs starting businesses.
Evolution of Silicon Valley
Because of its closeness to Silicon Valley, venture capitalists fund the vast majority of deals in the technology business, which includes the internet, healthcare, computer hardware and services, mobile, and telecommunications. However, other industries have profited from venture capital funding. Notable examples are Staples and Starbucks (SBUX), both of which received venture capital.
VC is no longer the domain of elite corporations. Institutional investors and established firms have also joined the competition. For example, industry behemoths Google and Intel have separate venture funds that invest in innovative technologies. In 2019, Starbucks established a $100 million venture fund to invest in food-related startups.
Venture capital has matured over time, with larger average deal sizes and more institutional players in the mix. The industry today includes a diverse range of companies and investor types who invest in various phases of a startup’s development, based on their risk tolerance.
Latest Trends
The VC industry experienced both highs and lows in 2022, according to data from the NVCA and PitchBook. The industry’s momentum continued from 2021, but it was mainly concentrated in the first two quarters. In the final quarter, VC activity was only 25% of what occurred in Q1. The industry raised approximately $160 billion for the entire year.
The momentum in this report was mostly driven by the zero-to-low interest rate environment that followed the COVID-19 outbreak, as well as Russia’s invasion of Ukraine. Silicon Valley Bank was one of the many institutional investors that began backing startups, notably in the technology industry. It was particularly popular among venture capitalists, who often utilized the bank to store their wealth. However, rising interest rates resulted in decreased deposits from supporters, prompting winds to shift in the business. The bank announced that it lost almost $2 billion on the sale of an investment portfolio, prompting consumers to withdraw their funds. On March 12, the Federal Deposit Insurance Corporation stepped in to take control.
Why is venture capital important?
Innovation and entrepreneurship are the foundations of a capitalistic economy. However, new firms can be risky and costly endeavors. As a result, external financing is frequently sought to reduce the risk of failure. In exchange for taking on this risk via investing, investors in emerging firms might gain stock and voting rights for cents on the potential dollar. As a result, venture funding enables startups to gain traction and entrepreneurs to achieve their visions.
What percentage of a company do venture capitalists possess?
Depending on the stage of the firm, its prospects, the amount of money invested, and the connection between the investors and the founders, VCs will often possess 25-50% of a new company.
What Are the Differences Between Venture Capital and Private Equity?
Private equity includes venture capital. In addition to VC, private equity encompasses leveraged buyouts, mezzanine finance, and private placements.
What is the difference between a VC and an angel investor?
While both contribute funding to startups, venture capitalists are often experienced investors who invest in a diverse portfolio of new firms, providing hands-on guidance and leveraging their professional networks to benefit the new firm. Angel investors, on the other hand, are typically rich individuals who like investing in new firms as a hobby or side project and may not give the same level of professional advice. Angel investors often invest initially, followed by VCs.
The Bottom Line
Venture capital is a crucial factor in the growth of a new business. In order to start generating revenue, a company needs sufficient start-up capital to hire staff, rent or purchase facilities, and begin developing their products. Venture capitalists provide this funding in exchange for a share in the ownership of the new company.
