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Angel investing versus venture capital: Part I

Brian O'Connell

Popular convention has it that venture capital is the most common and popular form of startup funding. But a deeper look inside the numbers reveals that angel funders, over the long haul, are much more likely than venture capital firms to provide seed money to a new business startup.

According to Fool’s Gold, a book by Scott Shane, a professor of Entrepreneurial Studies at Case Western Reserve University, VC firms, on average, only fund 400 to 600 early-stage companies in the U.S. each year. Angel investors, on the other hand, fund about 16,000 early-stage (or “seed” companies) annually.

In short, Shane is saying that angel investors are an entrepreneur’s best bet for early-stage funding (at least when compared to venture capital firms) by a 27-to-1 ratio.

These facts on both funding sources, from the business planning and equity crowdfunding firm, will give you a better idea of what each investor does, why he or she does it, and what he or she looks for before cutting checks.

Angel Investors

  • U.S. angels invest a total of around $20 billion per year in around 60,000 businesses.
  • Angels invest in around 1 out of every 10 business investment deals considered, or 10 percent.
  • The average angel investor is 47 years old, college educated, and self-employed (or has been self-employed).
  • The average angel investor has an annual income of $90,000, a net worth of $750,000, and invests $37,000 per venture. (Angels rarely invest more than a few hundred thousand dollars in a venture.)
  • 9 out of 10 angel investments are devoted to startups with fewer than 20 employees, and 7 out of 10 angel investments are made locally (within 50 miles of the angel’s home).
  • 9 out of 10 angels provide additional support via personal loans or loan guarantees to the firms in which they invest.
  • Angels expect a 26 percent average annual return at the time they invest – and expect about one-third of their investments to result in a substantial capital loss.
  • Angels spend an average of 3.5 months conducting due diligence on each investment.
  • The most common reasons angels reject deals are insufficient growth potential, overpriced equity, insufficient talent of the management, or lack of information about the entrepreneur or key personnel.

Venture Capitalists

  • Venture capitalists (VCs) invest a total of around $30 billion per year in around 4,000 businesses.
  • VCs invest in only about 1 out of every 100 business investment deals considered, or 1 percent.
  • VCs look at substantially more deals than Angel Investors.
  • The average VC invests $7.5 million per venture and expects a 25 percent average annual return.
  • Although most VC firms have a website and other ways of sending in cold call solicitations, it is best to be referred to a VC by someone who is known to the VC.
  • VCs conduct significantly more due diligence than angel investors do, spending an average of 5 months on due diligence for each investment.
  • Given the high cost of due diligence, one of the main problems of the VC is finding time to allocate to projects that are most promising.
  • Every VC firm and every partner has particular reject rules. For example, they may have decided to avoid a particular market or technology area.  Or they may be ready to make an investment in an applicant’s competitor.  Or they may have decided they are over-weighted in a certain market or technology.
  • Overall, VCs have more sector experience, invest in larger firms, and conduct more sector research.  They meet an entrepreneur more often before investing, take more independent references on the entrepreneur, and analyze the financials more thoroughly.  VCs demand a more comprehensive business plan from the entrepreneur; incur more research costs; document their investment process more; consult more people before investment; and take longer to invest.

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