When a startup seeks funding, it commonly seeks support from investors such as venture capitalists and angel investors.

Distinguishing between venture capitalists and angel investors can be somewhat complex because, in essence, they both serve a similar purpose for early-stage companies: providing financial support to sustain the business.

However, the key distinction lies in the source of the funds. Venture capitalists invest funds managed collectively by a venture capital fund or firm, whereas angel investors invest their personal funds.

Angel Investors: Angel investors are affluent individuals who invest in early-stage companies in exchange for an ownership stake in those businesses.

They typically use their personal funds for these investments and often take an active role by providing guidance and mentoring to the companies they support. Notable angel investors in the cryptocurrency space include:

1. Roger Ver - Often referred to as "Bitcoin Jesus," he was an early investor in Bitcoin and has supported startups like Blockchain.info, BitPay, and Kraken.

2. Barry Silbert - The founder and CEO of Digital Currency Group, a company that invests in and acquires cryptocurrency-related businesses.

3. Naval Ravikant - Co-founder of AngelList, he has invested in projects like MetaStable, Algorand, and others.

4. Charlie Lee - The creator of Litecoin, he has also invested in various cryptocurrency-related startups.

How Do Angel Investors Work

Angel investors invest in firms in their early phases. That is, they invest in the initial rounds of funding. Angel investors also provide significant support for subsequent phases, such as the Early Traction stage (Stage A) or the scaling stage.

The following are the basic steps in the process:

  • Seminars, referrals, and other formal business meetings are used to facilitate basic communication between the investor and the company management.
  • The investor interviews the firm's founders in order to chart the company's progress and success.
  • Investment terms, investor rights, and exit plans for investors are being developed.

Venture capitalists: Venture capitalists, often referred to as VCs, are investors who provide funding to startups and early-stage companies that have substantial growth potential.

They are typically associated with professional investment firms or funds and tend to make larger investments compared to angel investors.

In exchange for their investment, VCs acquire equity in the company and often play an active role in its operations.

Their goal is to generate returns when the company goes public or gets acquired by selling its equity. Some renowned VC firms in the cryptocurrency space include:  Andreessen Horowitz, Blockchain Capital, Coinbase Ventures, Digital Currency Group,  Polychain Capital, Pantera Capital

How Venture Capitalists Operate

Venture capitalists engage in a meticulous examination of a business plan before committing to an investment. The company's management presents its most favorable business projections and the strategies it intends to employ to achieve those goals.

The subsequent steps entail negotiation for investment terms to establish a fundamental Memorandum of Understanding (MoU) between the venture capitalist and the company. Following the MoU, the venture capitalist proceeds with the following post-MoU processes:

1. In-depth industry research.

2. Evaluation of market growth rates.

3. Assessment of competitor businesses' performance.

4. Estimation of market size, product life cycles, and distribution channels.

Once these steps are finalized, the last stage entails complete disclosure of the company's particulars, including details such as shareholder agreements, investor veto rights, and comprehensive company audits, among other factors.

Here's a table summarizing the key differences between angel investors and venture capitalists based on the provided information:

Aspect        

Angel Investors    

Venture Capitalists

Stage of Investment

Early-stage businesses  

Later-stage businesses with growth potential

Size of Investment      

Typically smaller, ranging from $10,000 to $100,000

Often larger, potentially millions of dollars 

Involvement in Company  

Usually hands-off approach

Actively support and engage in company operations 
 

Exit Strategy  

Longer investment horizon may exit through IPO, merger, or acquisition

Aim to exit within 5-7 years, often through IPO or acquisition

Source of Funds   

High-net-worth individuals investing their own money

Manage funds for high-net-worth individuals or institutions

Risk Tolerance     

Generally more willing to accept higher risk 

Focus on risk minimization and due diligence

Investment Criteria  

Flexible criteria, less stringent requirements

More rigid criteria with specific milestones

Portfolio Diversification

Tend to have a more diverse portfolio 

May have a more concentrated portfolio focused on specific industries or sectors

This table highlights the primary distinctions between angel investors and venture capitalists in terms of their investment strategies, involvement, and preferences.

Below is a table summarising the weaknesses of angel investments and venture capital:

Aspect  

Weaknesses of Angel Investments   

Weaknesses of Venture Capital        

Limited Funds 

Limited investment size may constrain support for larger firms.

High expectations may place pressure on startups to meet specific benchmarks. 

Lack of Due Diligence

Relying on instincts and personal relationships could increase the risk of failure.

Short-term focus may force startups to prioritize quick returns over long-term growth.

Long-term Commitment  

Long-term investment horizon may limit exit options for both investors and startups.

Limited influence on important decisions within funded firms may be a drawback.

This table highlights the respective weaknesses of angel investments and venture capital, providing insights into the potential challenges startups may encounter when choosing to work with either or both forms of investment.

Conclusion,

Both angel investors and venture capitalists have significant roles in the initial stages of a company's financial growth. While not all the companies they support aim to go public, a substantial number do.

For investors considering an emerging business that has recently gone public, it's beneficial to grasp the company's financial journey leading up to this point.

If the company did opt for venture capital funding, taking the time to research the VC firm and its track record, including its success rate, can provide valuable insights into your prospective investment.

Learn more about investment banking and financial modelling by enrolling in the Investment Banking & Financial Modelling Program by our mentors!