The terms venture capital (VC) and angel investing are almost always associated with startups. Picture any startup that has achieved “unicorn” (more than $1 B valuations) status, and you can be sure that a venture capital firm has backed them. Some had angels investing in them in their early days. Facebook, for example, received an angel investment in August 2004 of $500 K from Peter Thiel, a notable billionaire entrepreneur and venture capitalist. Facebook later received numerous VC funding from Accel Partners, Breyer, Horizons Ventures and many others. The funds received ranged from $12M to $1.5B, before going on IPO in May 2012. This example demonstrates some of the key differences, like the amount invested and the timing of the investment, between angel investing and venture capital.
What are the other differences between angel investing and venture capital? How do startups avail of either type of investment? Who are the most notable VC firms, venture capitalists and angel investors?
What is Angel Investing?
Angel investment can be considered a significant source of investment for startups. In Europe alone, in 2018, $5 B came from private wealth from angel investors. The Angel Capital Association (ACA), the North American trade association of angel groups and private investors, reported over 1,150 deals representing investments valued at $228M from 68 major angel groups for 2019.
Angel investors (also known as business angel, informal investors, angel funders, private investors, or seed investors) are wealthy individuals who provide capital for startups, usually in exchange for convertible debt or ownership equity. They step in and invest in startups before venture capitalists (VCs) and puts their finance into the growth of a small business at an early stage. They sometimes offer their advice and business experience. A group of angel investors can also band together to fund startups or even a friend or family member of startups who’s decided to put some money in. Most of the times they are often entrepreneurs who have experienced success in their startups and other business ventures and are helping up, and coming entrepreneurs launch their startups.
Angels make their own decision about the investment, and in return for providing personal equity, they take shares in the business. The amount they invest is flexible – it could be a small amount to get a startup off the ground or a more significant amount that can also result from pooling funds with other angels. Many of these angels can provide insight and advice, but they are often not involved in building the startup and therefore do not sit on the board like other investors.
Origin of Angel Investing
The application of the term “angel” originally comes from Broadway theatre, where it was used to describe wealthy individuals who provided money for productions that would otherwise have had to shut down. In 1978, William Wetzel, a then-professor at the University of New Hampshire and founder of its Center for Venture Research, completed a pioneering study on how entrepreneurs raised seed capital in the US. He began using the term “angel” to describe the investors who supported them. A similar term, “patron”, is commonly used in arts.
Angel investments are extremely risky as the majority of startups fail. They are often subject to dilution from future investment rounds and, as such, require a very high rate of return. Typically, angel investors seek a return of 10x over a holding period of 5 years but recently, because of the proliferation of startups and new technologies, the risks are even higher. It is not uncommon in current angel investment practices to seek a 20 to 30x rate of return over a 5 to 7 year holding period.
In terms of deal flow and access to angel investors, an increasing number of angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share investment capital, as well as to provide advice to their portfolio companies.
What is Venture Capital?
Venture capital (VC) funding is a whole new ballgame. Instead of individual investors, funding from venture capital involves an entire firm – professional investors, board members, and people whose job is to help a startup develop generally. Their money comes from various sources – corporations and individuals, private and public pension funds, foundations. They can also invest on their own or co-invest with other VC firms in practice called syndication. VC syndication means having several investors get together and share in the deal rather than making the entire investment alone.
Those who invest money in venture capital funds are called limited partners (LPs). The people managing the fund and working with individual companies are called general partners (GPs). The GPs are the people who work with the startups to ensure that it is developing.
VC firms find businesses with high growth potential. The firm takes shares and gets to have a say in how the company is run and its future. VCs are given a seat on the board of the company. In exchange for their involvement, venture capital firms expect a high return on investment. After some time, often years, the VCs sell shares in the company back to the owners or through an initial public offering. In the process, they are hopefully making much more than what they invested in.
Classification of VCs
Venture capital usually deals with vast amounts of money – rather than seed funding. The typical ticket size is above $1M. It can be multi-million deals, especially if there is syndication involved. VCs can be classified according to the sectors they invest in. However, sector-agnostic VCs have an investment focus – like SaaS, platforms, marketplaces for software or specific verticals like fintech, healthtech, machine learning, AI, etc. They can also be classified based on the investment stage. There are VC’s who invest only in early-stage startups – from seed to Series A-C, while there are those investing in later stages (Series D or pre-IPO). Some VCs have requirements on the location of the startups they invest in. Lately, VCs are investing in startups with specific criteria like women and underrepresented founders, social impact, climate technology, etc.
Origin of Venture Capital
If we look back at the history of venture capital, before World War II (1939–1945), venture capital was primarily the domain of wealthy individuals and families. JP Morgan, the Wallenbergs, the Vanderbilts, the Whitneys, the Rockefellers, and the Warburgs were notable investors in private companies. Only after 1945 did “true” venture capital investment firms emerge. This came with the founding of American Research and Development Corporation (ARDC) and J.H. Whitney & Company in 1946. Georges Doriot, the “father of venture capitalism”, and Ralph Flanders and Karl Compton (former president of MIT), founded ARDC in 1946 to encourage private-sector investment in businesses run by soldiers returning from World War II. ARDC became the first institutional private equity investment firm to raise capital from sources other than wealthy families. Former employees of ARDC went on to establish several prominent venture capital firms. These firms include Greylock Partners, founded in 1965 by Charlie Waite and Bill Elfers; Morgan, Holland Ventures, the predecessor of Flagship Ventures, founded in 1982 by James Morgan and Fidelity Ventures, now Volition Capital, founded in 1969 by Henry Hoagland.
Fast forward to 2002, 2 years after the Nasdaq crash and technology slump that started in March 2000 shook the entire venture capital industry virtually as valuations for startup technology companies collapsed, VC deal values have long recovered and even ballooned to its 2020 value of $119.5 B:
Venture Capital vs Angel Investing: Key Differences
Variety of amounts, generally seed funding. A group of angels can pool an investment together but typically less than $1M
Typically, after seed funding and less likely below $1M although there are VC’s which invest at pre-seed or even seed stage
Who They Invest In
Startups showing compelling promise and growth potential – usually from Series A funding and onwards
Advisory capacity but do not have a seat on the board
Board seat, regular involvement and has a say and how the business is run
Quick decision to invest often from personal involvement and working alone
VC investment requires time. VC firms evaluate – conduct research, due diligence and other processes
Help less experienced businesses within their sectors, re-invest earnings from their own businesses
Find businesses with high growth potential, expect high return on investment
Notable Venture Capital Firms
Entrepreneur released its list of top VC firms for 2020, based on investment to exit ratio only (values in parenthesis). The investment to exit ratio is one of the best performance measures of venture capital firms. A ratio of 1 means a VC is making one investment for every exit or no growth. A ratio of above one would mean the VC is the net acquirer of portfolio companies or a growth scenario. The higher the ratio, the better it is. Here is the top five from that list:
1. Khosla Ventures (13.58%) – Based in Menlo Park, CA, Khosla was founded in 2004 by Vinod Khosla, Co-Founder of Sun Microsystems. This VC firm has made about 700 investments, of which 96 have moved to the IPO stage. It primarily invests in China and the US and mainly in the software industry. Although it focuses on one segment, it has been highly successful in its 16 years of existence so far. Notable exits include Square, Okta and Big Switch Networks.
2. Sequoia Capital (20.71%) – A pioneering VC firm, Sequoia, was founded in 1972 and is based out of Menlo Park, CA. It partners with companies in early late-growth stages across several industries. It has been recently focusing on internet, mobile, healthcare, financial, energy and internet companies. They have made about 1,275 investments, of which 365 were successful exits, with a success rate jump to 63% when they are the lead investor. Notable exits are NVIDIA, Instagram, ServiceNow.
3. Accel (20.77%) – Founded in 1983, Accel operates in California, London, China and India. The VC firm primarily invests in consumer software, mobile technologies, enterprise software and the internet. They have made about 1,350 investments, of which 280 were successful exits with a success rate jumping to 55.56% when they act as the lead investor. Among its most successful assets are Facebook, Crowdstrike and Animoca Brands.
4. New Enterprise Associates (NEA) (20.96%) – Founded in 1977, headquartered in Chevy Chase, Maryland, with offices in San Francisco, China, India, Baltimore, Boston and New York. NEA focuses on healthcare and technology and invests from seed to IPO. They have made about 1600 investments, of which 333 were successful exits with a success rate rising to 57.41% when working as the lead investor. Some of their notable exits are Uber and Workday.
5. Kleiner Perkins (21.13%) – Founded in 1972 and initially mainly investing in software and hardware firms; over time, it has grown its portfolio to include companies in the healthcare, mobile, internet, enterprise software and biotechnology industries. It now invests in early-stage startups, where previously it used to invest in late-stage growth companies. They have made over 1,100 investments, of which 240 went for IPO with a success rate of about 79% when they act as the lead investor. Twitter, Uber, Peloton and Beyond Meat are among their most notable exits.
Other notable VC firms worth mentioning are Bessemer Venture, Intel Capital, Andreessen Horowitz, Benchmark, Index Ventures, Founders Fund, GGV Capital and IVP.
Notable Venture Capitalists
Every year, Forbes releases its ‘Midas List’, the world’s best venture capital investors. In the top 5 of Forbes’ 2021 Midas List are:
On top of the list is Alfred Lin, ex-Zappos executive and Partner at Sequoia, who catapulted to no.1 from no. 32 of the previous year by way of two of the 10 biggest-ever exits among US tech firms — food-delivery service DoorDash went public on the New York Stock Exchange, which ended the day with a market capitalization of $60 billion and the next day, home-rental leader Airbnb listed on the Nasdaq, with a $79 billion market cap. Those two outcomes alone generated profits—on paper, at least—of more than $21 billion for Lin and his VC firm, Sequoia.
Notable Angel Investing Platforms/Organizations
Business Angel Networks – angel investors are individual investors, but they also band together by forming angel investment clubs that are often location-specific. These clubs then organize regionally. An example of a local business angel club is the Sophia Business Angels (SBA), based in the French Silicon Valley, Sophia-Antipolis in the French Riviera. SBA is then affiliated with the more extensive business angels in Europe – the European Business Angels Network EBAN. In the US, a similar organization is the Angel Capital Association (ACA).
Crowdfunding Platforms – angel investors also invest via crowdfunding platforms, allowing individual, small-time investors to diversify their portfolios and gain ownership in high growth startups. Notable crowdfunding platforms include AngelList, Kickstarter, Indiegogo, Crowdcube, Fundable, CircleUp, SeedInvest and Seedrs.
Notable Angel Investors, Worldwide
Here are some notable angel investors worldwide investing individually or through crowdfunding platforms:
Jay Adelson – a serial entrepreneur himself, being the founder of Opsmatic, Revision3, and Equinix. The Ouya gaming console was a big hit on Kickstarter, raising over $8.6 million, which brought it to the attention of several angel investors, including Jay Adelson.
Matt Mullenweg – founder and developer of Automattic; the company behind WordPress. He has also invested his money in SmartThings, a home automation startup that generated $1.2 million in a rewards-based crowdfunding campaign.
Elad Gil – co-founder of Mixer Labs and a genomics company. Mixer Labs created a location engine for developers along with a local information site. He was the former Vice President of Twitter and started a mobile team at Google. Elad invests in Formlabs, the creators of the Form 1. Form 1 is a low-cost 3D printer used by engineers, designers, and other creators.
Andrew Busey – founder and CEO of Challenge Games, which Zynga acquired. He was one of the early investors in Ube, a home automation startup that generated over $307K through rewards-based crowdfunding and a further $760,650 through equity crowdfunding through Fundable.
Notable Angel Investors, Europe
Looking at Europe, these are the most notable angel investors:
Xavier Niel – a well-known figure in European Tech and a well-respected angel investor. Forbes puts his net worth at an approximate $6.1bn, from owning a majority stake in publicly traded French company Iliad, the parent company of his telecom service Free.
Oleg Tscheltzoff – in 20014, he cofounded Fotolia.com, an online marketplace for stock images, which ultimately became the world’s largest microstock photography site. He has made over 30 investments as an angel investor, with notable investments in the US and Europe.
Jacques-Antoine Granjon, the French online shop Vente-Privee, was one of France’s first tech unicorns. He supports other up-and-coming entrepreneurs and is one of France’s top ten most active angel investors.
Alex Chesterman – the founder of Zoopla, the UK-based property website. He also founded LoveFilm, which was ultimately sold to Amazon for £200m. He is one of the most active angel investors in the UK, having backed dozens of early-stage tech startups, including Graze, Secret Escapes, UniPlaces and Farmdrop.
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