When entrepreneurs approach venture capitalists for funding, they analyze the business plan and conduct independent research to determine the viability and potential of the plan. Having contributed, they offer their expertise gained from having made investments and involving in several other ventures, to the entrepreneur to determine the best marketing strategy, set up distribution networks, and other crucial aspects of running the business. The combined efforts of the venture capitalists and the entrepreneur, with the terms for what constitute optimal performance by both parties written in a contract, very often creates a synergy that increases the chance of success significantly.
Angel investors may be either a single rich individual or a group of wealthy individuals investing in a firm. They depend on personal contacts to screen deals, conduct due diligence, negotiate terms, secure additional rounds of funding, and execute an exit strategy.They usually have some connection with the industry to be convinced of the potential and prospects of the business, but rely more on their gut feelings and individual perceptions when making decisions compared to the purely objective analysis on which venture capitalists base their investment decisions.
Nothing prevents angels from becoming involved in businesses they finance just as venture capitalists do, but in practice they usually remain passive investors, not adding much value to the firm, and leaving the entrepreneur to utilize the funds in the manner they deem fit. Their very nature, being independent investors rather than a professional investment company with extensive industry experience, places limitations on their ability to add value, even if they wish to involve themselves in company operations.
The stricter due-diligence made by venture capitalists make such sources of funds harder to come by compared to angel investor funds. Industry trends reveal that only about one firm secures venture capital funding for every ten firms securing angel funding. Many start-ups may not have a proven business model to attract venture capital funds, and as such, may have to start by enticing an angel investor, and as the business kick-starts and the vague idea translates to genuine potential, the entrepreneur may explore venture capital options. An entrepreneur may source funds from both venture capitalists and angel investors simultaneously.