Day 14 – Q 5.What do you understand by venture capital? How is it different from angel investing? Illustrate.
5. What do you understand by venture capital? How is it different from angel investing? Illustrate.
वेंचर पूंजी से आप क्या समझते हैं? यह एंजेल निवेश से कैसे अलग है? उदाहरण देकर स्पष्ट करें।
Venture capital is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth. Venture capital and angel investments are the most common alternative sources of funding, both angels and venture capitalist firms cater to innovative startup businesses, and both tend to prefer companies related to technology and science.
How venture capital is different from angel investment
1. What they are:
- Venture Capital Firm: These are the mostly the Limited Liability Partnership firms/funds, which raises fund from different investors. As against Angel investment where the decision of investment rests with the individual, a Fund/ Portfolio Manager in Venture Capital firms is the one who hunts for promising deals to get the best returns for their investor’s money. Example of VC/PE active in India are- Kalaari capital, Nexus Venture Partners, Accel Partners, Tiger Global Management, Helion Venture Partners etc.
- Angel Investors: Are the High Net-Worth Individuals (HNIs), who generally forms closed groups called angel network and collectively invests in a venture. Angel network helps them to make more informed investment and reduce the risk of an individual as pool of investors are investing small amount in multiple companies. They do it in exchange of equity in the startup. Examples of Angel/Angel Networks active in India are- Mumbai Angels, The Chennai Angels, Indian Angel Network, Hyderabad Angels, The Indus Entrepreneurs.
2. Whose Money is invested?
- Venture Capital Firms: This is an investment firm, which raises money from various HNIs/ investors and invest it on their behalf in various startups. VCs have fund/ portfolio managers to manage their investment portfolio. They have a dedicated and skilled team, which looks out for promising opportunities, and get the deal closed.
- Angel Investors: Angel investors, invests their own money in the ventures after doing enough due diligence on their part. They often forms groups and pool their money to invest together. But this requires the domain know-how and also investors have to invest their time to hunt the deals, meet with the founders, documentation of investment, monitoring on the use of funds by the startup.
3. Who Makes the Decision
- Venture Capital Firms: As against angel investors in case of VCs the portfolio manager hunts for the most profitable deals for the investors who have contributed to the fund. On an average, a fund is raised for 10 years. So, fund manager is even more diligent than the angel investor in choosing the right deal.
- Angel Investors: Since the money involved in this case is their own, due diligence is made by the investors. Since angel investors invests in the very initial stages of the company, there are very few numbers available to convince the investors, most of the deals are made on logical hunches- like the scalability of the idea, Product Market Match, Founding Team. Read “What investors look for in a business before investing” for details.
- Stage of Investment
- Startups are a risky asset, 90% of the companies, which are born dies. Only 1% gets funded and Out of 10 funded startups, 7 companies die. That means there are very high chances of your money being wasted. That means the initial stages are the most crucial ones and involves highest risk.
4. Majorly there are four stage of any startup
- Seed Stage
- Early Stage
- Growth Stage
- Expansion Stage
- Venture Capital Firms: Venture Capitals generally invests in Growth stage (Series A) and forward, when the company has some proven numbers. As compared to angels they are less risk takers.
- Angel Investors: Angel investors are the high-risk takers. They can bet their money on the idea as well if they feel the potential in it. Now, since they are taking much risk than a VC (who invests in later stages) they expect greater chunk of your equity and high returns.
5. Their Support System
- Venture Capital Firms: Venture Capitals are more professional in their approach and guidance. With their alliance comes a huge support system of high profile contacts, experience etc.
- Angel Investors: Since the performance of the company entirely decides the fate of the investor’s money, angels do guide the startups (sometimes felt a poked nose) in all the matters. A member from the angel investor group takes the seat in the board of members as well, till the Venture Capital Firm invests unless angel is still the significant contributor.
The aforementioned differences between angel investors and venture capitalists brings forth pros and cons—especially from the standpoint of entrepreneurs or startup business organizations. Both alternative source of funding remain advantageous because they are willing to finance high-risk ventures without the need for assets or any collateral assets that are usually required by banks. This is the most noteworthy advantage shared by both funding source.