Students pursuing a career in finance often come across several questions about the role of an angel investor and that of a venture capitalist. In many ways both entities seek the same aspects, but there are a lot of variations that graduates stepping into the field must understand. It is subtle differences that participate in influencing their financing strategy ultimately.
Stepping into the banking sector in Singapore requires you to acquaint yourself with the delicate ins and outs of being angel investors as well as venture capitalists.
1.Proportion of Own Investments
Venture capitalists end up investing a large amount of their own capital into the company that usually turns out to be much more than what the angels put in. Angels can either operate as groups investing or even individuals putting in money. While the amounts of money vary largely, deals are worked on by Angel Groups in syndicate when they are substantially larger and more profitable.
Group operations are fast becoming more popular primarily because the money can be drummed up more quickly; while maintaining the same terms.
- Commitments Made
When it comes to giving their word, angels are not beholden to any commitments. They take business related decisions on their own and use personal prowess and knowledge to do so. Capitalists use a different approach as they consult with an investment committee that decides on the best approach to take while being as objective as possible. There is no getting swayed one member’s personal information or another’s apprehension or excitement about a deal.
- Time Frame of Investment
Angels are the ones who have to decide on acquiring assets earlier than venture capitalists, which is why they face a higher risk. The key is that they need to attain the same level of returns as venture capitalists that makes the risk worthwhile. It is crucial that they attain high returns for a majority of their deals need to enhance their portfolio of investments showing at least 20-30% per year. The main strategy is to look for an Exit, or Liquidity Event in which case both entities end up gaining back all of their equity within 3-5 years.
However, most equities tend to take longer time to exit. Individuals in venture are even more under pressure for they have a total span of 10 years under which they have to return the capital and profits of the Venture Capital Fund to the Limited Partners.
4.A Business Point of View
In most cases entrepreneurs shy away from capital raising, for it gets in the way of building products and contacting customers. Diluting equity is always taken as a last resort when the workings are saturated and new capital is needed for expansion and diversification. Angel investments can aid in businesses attracting good venture capitalists.
A couple of factors will be in play such as the ability of a business to function with little to no income for a long time along with the accessibility of Angel Investing Groups. Interested venture capitalists matter as well for attracting them sees a swell in entrepreneur’s liquidity.