I see this confusion a lot: People use the terms “venture capital,” “venture capitalist,” and “VC” to apply to any outsider investing in a startup. However, it’s really useful to draw some distinctions in this area, between three important classifications: venture capital, angel investors, and anybody else.
Venture capital means big-money investment managed by professional investors spending other people’s money. The money comes from extremely wealthy people, insurance companies, university endowments, big corporations, etc. Think of Kleinert Perkins et al., First Round, Softbank, Oak, etc. Venture capital usually comes in millions of dollars.
Angel investment is people who are accredited investors as defined by the U.S. Securities and Exchange Commision (SEC), which sets wealth criteria:
they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year.
Those rules were going to relax with the Jobs Act of 2012, which people would open the gate to crowdfunding, but hasn’t yet.
The most important distinctions between angels and VCS are:
- Angels invest their own money; VCs invest other people’s money.
- Angel investment is much more likely to be in hundreds of thousands than in millions of dollars.
Aside from those two distinctions, it is generally true that VCs will be more rigorous in studying (called “due diligence”) the investment before they make it. Both angels and VCs will have similar processes for looking at summaries, then pitches, then business plans.
Anything else is called “friends and family,” which really means “not VC” and “not angel investment.” The laws on investment allow a few so-called friends and family, but there are limits. The intention of all the regulation in this area is to prevent the kind of stock frauds that were rampant during the great depression.
I’d like to know what you believe should be first for a the person with
a unique idea, little education, no money and a paper trail that shows possibilities exist for an amaizing one of a kind but not yet introduced as it needs to reach beyond in the world and online life of a collector.
…Unique beyond belief….people want thease they hunt and search the web in unimaginable numbers …
@Jessica, thanks for asking. I have several dozen posts here on this blog about business ideas and what to do with them. I’d recommend you browse my business ideas category here. You might look especially at how to protect a software idea and also how to make money on your idea.
Thanks Tim your article was helpful to me.
Thanks for your article. I have a question. How do we find these angles? Where? When?
The answer depends on where you are. Do a web search for “angel investors in [xxx]” where xxx = your city or country.
Hi I need To know how to go about when I want to apply for engel funders for my business?
The answer depends very much on where you are and what your business is. You can browse the angel investment category here on this blog, and search for “angel investment” on this site for much more information on this topic.
That depends on where you are. If you are in the US, buy David Rose’s book Startup Checklist, The Startup Checklist: 25 Steps to a Scalable, High-Growth Business. Or google “how to find angel investors” and look at the offerings that aren’t selling you consulting services.
I never knew that there was an accreditation process for angel investors. Interesting. Thanks for sharing this, Tim.