Angel investors vs. venture capital funds

I am always frustrated by comments that “limit and label” angel investors and venture capitalists by simple definition. These labels tend to categorically define them as two simple and separate buckets of capital deployed for different purposes.

In the real world of capital formation for early stage companies, the two investment forms are more similar than different. And, interestingly, they both present themselves in many sizes, shapes and flavors.

I should clarify that there is one difference between angels and VCs. Angels invest their own money, while VCs invest other people’s money; most VCs aggregate capital from institutions like pension funds and major investment managers.

Similar best practices

Both angels and VCs place money at risk in new concepts for business, primarily in high-tech, early stage companies and health care startups. They also invest in agricultural technology, new energy solutions, industrial modernization and new consumer product companies.

They both can be sophisticated or unsophisticated. I once heard someone describe angels as unsophisticated and VCs as sophisticated. The individual who suggested that notion was quickly reminded by a VC that not al VCs are sophisticated. The VC listed the names of several VCs who lost all their money due to lack of sophistication and insufferable hubris.

Many angels and VCs deploy an identical set of best practices when creating a portfolio of early-stage companies. The due diligence list and activities are often alike. The depth of the research includes background checks, intellectual property review, market intelligence, financial analysis and corporate documents, such as employment contracts, insurance reviews, etc.

The terms for investment are frequently the same with preferred stock, liquidation preferences, anti-dilution rights, protective provisions, information rights, drag along rights and board participation, to name a few. And, like VCs, angels introduce their portfolio companies to fellow investors, vendors and potential acquirers.

Different investment stages

Where one can see some differences is the stage at which most angels and VCs invest.

According to the National Venture Capital Association and Jeffrey Sohl at the University of New Hampshire’s Center for Venture Research, 2014 estimates for U.S. angel and VC activity are:
                                                Angels         VC
Dollars invested              $24 billion    $48 billion
Number of companies    73,450          4,356
Seed stage                           18,350            192
Early stage                          33,764          2,165
Expansion stage                20,552          1,156
Later stage                               784             843

Based upon these numbers, angels tend to invest in earlier stage ventures and in smaller dollar amounts across all growth stages of their portfolio companies. This is logical since VCs manage larger sums of capital and need to deploy larger amounts, which is typically needed during the expansion stages of companies.
Interestingly, angels tend to take the earliest risk and position early stage companies for funding by VCs.

 

At the end of the day, both add value to capital formation in our economy and are necessary for successful development of new businesses, job growth, leading edge cures for diseases, efficient energy processes, leaner manufacturing, etc. They are more like team members than two separate categories.

 

Catherine V. Mott is the CEO and founder of BlueTree Capital Group, BlueTree Venture Fund and BlueTree Allied Angels located in Western Pennsylvania. As one of the more than 370 professional managed private investor networks in the U.S. and Canada, BlueTree Allied Angels has invested more than $27 million in 43 regional startup companies.