The most usual comparison to angel investors is venture capitalists. Because the two groups are involved in similar businesses and in similar ways, the comparison is natural, but they have some very large differences. It can be helpful for someone starting a new business and seeking funding to have a firm grasp on these similarities and differences.

Similarities

These two investor groups have much in common:

SELECTIVE INVESTMENT. While historically called sources of -"dumb money-" for investing in ideas with little understanding or up-front analysis, angels are becoming increasingly sophisticated through trial and error, angel organizations, educational programs, and the like. As a result, most angels now go through investment due diligence processes very similar to those of venture capitalists. Therefore, jus as venture capitalists are highly selective about investments fitting into their investment profile for maturation stage, industry focus, portfolio compatability, investment terms, and other criteria, angels will often have similarly individualized investment selection requirements. This tells you as the entrepreneur that knowing your audience's interests, preferences, and investment criteria is important if you want to avoid wasting your time and that of the investors by promoting a deal that is ill-suited for your audience. As noted earlier, on average, less than one in a hundred start-ups receive angel investing-and less than one in a thousand receive venture capital financing.

REQUIREMENTS FOR AN INVESTABLE COMPANY. An investable company is not just one with a good idea. Investors must see numerous other attributes-a great management team, a realistic exit strategy for themselves, an attractive multiple on the investment, a simple, straightforward ownership structure, innovative technology, and clear intellectual property ownership for starters, and the list goes on.

EXPECTATION OF RETURN ON INVESTMENT. Investing is not a philanthropic activity (though the typical investor will see a strong multiple return on only three out of ten investments, so the effort may seem like charity). Investments by friends and family are often called -"love money-" because the basis for investment is apt to be affection for the entrepreneur rather than any sort of critical analysis. An angel or venture capitalist is a third-party, professional investor with no established affection for the would-be entrepreneur.Without a reasonable expectation of return on the investment, such an investor simply will not risk putting capital into a company.

SIMILAR INVESTMENT TERMS. Even up to five years ago, angels accepted common stock in return for their investment-then found themselves at a distinct disadvantage when venture capitalists came in and received preferred stock with rights, preferences, and privileges far superior to those of common stock, despite the angel having invested at a time of greater risk of loss. Though some angels still consciously select common stock for investment, most have learned their own lessons or learned at others' peril, and now insist on preferred stock (or debt conversion into preferred stock), placing them on a level similar to that of venture capitalists, who invest after angels and therefore at a less risky time in a company's development.

PROFESSIONAL ATTRIBUTES. Regardless of size, professional investors should bring three attributes to a company, and only the third of which is money. The first is experience and knowledge in their particular field of expertise, which adds value to the company and entrepreneur, and the second consists of connections to potential customers, vendors, resources, and follow-on financing.

Differences

Despite the similarities between venture capitalists and angel investors, significant differences abound. These differences not only involve priorities and deal structure, they involve the preferred stage of investment and the investors' importance to entrepreneurs.