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A Comparison of Angel Investors and Venture Capitalists

Legendary Venture Capitalist John Doerr of Kleiner Perkins

Every year 20 million Americans are involved in starting or growing a young business.  Many of these entrepreneurs seek capital from equity investors – either Angel Investors or Venture Capitalists.

There are more than 1,000 Venture Capital firms operating in the U.S. managing over $1 trillion.  There are more than 2 million Angel Investors who control an additional $1 trillion in capital.  Between the two groups, they invest around $50 billion in young businesses each year.  Interestingly, this is only 2.5% of the total $2 trillion in capital under management.

Here are some facts to help us compare the primary differences between Angel Investors and Venture Capitalists.

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%.

• 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 start-ups 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% 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%.

• VCs look at substantially more deals than Angel Investors.

• The average VC invests $7.5 million per venture and expects a 25% 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 have 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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At EquityNet we bring together entrepreneurs and investors – two groups that need each other to thrive, but often have a hard time finding the right match.  It’s no secret that inefficiencies in the private equity domain cause many otherwise game-changing businesses to go undercapitalized.  Remember: only 2.5% of the total $2 trillion in capital available is invested each year.  The solution to this problem is not more money. The solution is an efficient, very advanced marketplace that allows more smart money to be distributed to the right companies.  To learn more about how we solve this problem visit www.equitynet.com.

For more information on Angels & VCs check out these studies:

Center for Venture Research – The Angel Investor Market in 2010

PricewaterhouseCoopers – Venture Capital Activity in Q2 2011

Comparison of Angel & VC Investment Procedures

Angel Investing in the US

Investment Risk & Return of Angel Groups

 

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  • Marianne Hudson

    Judd, could you share the source(s) of the statistics you mentioned about angel investors? They are interesting and I don’t think I’ve seen them before. Thanks.

    • Judd Hollas

      Marianne, The Center for Venture Research at the University of New Hampshire (http://wsbe.unh.edu/cvr) produces a wide range of statistics on early-stage investing and angel investors in particular. Most of the statistics in this post were obtained from The Center for Venture Research.

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